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    Bulls & Bears

    This week, Brenda was joined by Gary B. Smith, RealMoney.com columnist; Pat Dorsey, Morningstar.com director of stock research; Tobin Smith, editor of ChangeWave Investing; Scott Bleier, president of HybridInvestors.com; Bob Froehlich, chairman of investor strategy for Scudder Investments, and John Rutledge, president of Rutledge Capital.

    Trading Pit: $3 Gas & Stocks

    Gas prices have skyrocketed since Hurricane Katrina hit and show little or no signs of falling anytime soon. Can stocks go higher if gas stays so high?

    Bob Froehlich: There’s nothing magical about $3/gallon for gas. People were saying the same thing when gas was at $1 and $2/gallon. This is only one element of our economy. I think what’s more important are interest rates, which are still very supportive of the stock market; profits, which will grow double digits in the 3rd and 4th quarters; and employment rates. High gas prices effect investors’ emotions, but it won’t stop the stock market.

    John Rutledge: This is no big deal. It’s painful, but mortgage rates are much more important for people and the economy. Interest rates are lower because the long-term inflation outlook is very good. Lower rates and growing profits are good news for stocks.

    Tobin Smith: There were so many things coming at us at once. It got very confusing. When some people are confused, they sell. But when you look at the data, gasoline prices have to get to $5/gallon before it can have the effect it did in the 1980s. That was a real recession. But what could be a big problem is that people are maxing out their credit cards to pay for gas and this is increasing default rates.

    Gary B. Smith: There’s no real relationship between consumer sentiment and what people spend. We’re at the stage where people complain about high prices, but they haven’t really done anything about it. And if they do start to do something, there are so many options: telecommuting, car-pooling, or public transportation.

    Scott Bleier: If gas prices stay at this level it will have a negative effect on the stock market. Everything gets more expensive because gas prices are going up. The cost gets passed on to anything like food, clothing, etc. that need to be transported. It will put a cap on the stock market. Consumer confidence and spending has been going down and it will hurt the stock market in the 4th quarter. This could even send us into a recession next year.

    Pat Dorsey: This has not had a huge effect yet, but we are starting to see high gas prices effect places where Americans with middle to lower incomes shop. Wal-Mart (WMT) and dollar stores are seeing their sales hurt because people are spending less. And a lot of the people who shop at these stores make up a decent amount of the country’s spending. Be careful of any company that lends money to lower income consumers, because these stocks will get killed.

    So if gas prices stay high, which stocks will head higher? The Bulls & Bears each give their picks.

    Gary B. Smith: I like the “Big Kahuna” in the oil game: Exxon Mobil (XOM). As oil prices go down, Exxon goes up and as oil prices go up, Exxon also goes up. This is a good one for anyone’s long-term portfolio. (Exxon Mobil closed on Friday at $63.54.)

    Tobin Smith: It’s hard to argue with Gary, but there are so many better stocks out there.

    John Rutledge: My pick is iShares MSCI Pacific (EPP). It’s the safe way of playing China growth. This fund invests in Australia and New Zealand, which is where China gets its coal. It also invests in Hong Kong and Singapore, which is where China gets direct investment money. I like it so much I own it. (iShares MSCI Pacific closed on Friday at $103.15.)

    Bob Froehlich: I don’t like it because it doesn’t have the exposure to Japan. It would be up a whole lot more if it included Japan.

    Bob Froehlich: I’m betting on retailer Family Dollar Stores (FDO). Those who shop at Family Dollar also shop at Kohl’s (KSS) and Target (TGT). However, business has slowed down at Kohl’s and Target and people are doing more shopping at Family Dollar. I do own the stock. (Family Dollar Stores closed on Friday at $19.87.)

    John: I’ve lost so much in retail over the years that I don’t invest in retail anymore. If I did invest in retail, however, I wouldn’t like it because the sector is a recession play. I think the economy is a lot stronger than people think.

    Scott Bleier: Smith International (SII) is ready to go higher. This is an oil service stock that makes drill bits and other equipment for oil rigs. Many oil service stocks have done well, but Smith has lagged a bit, and now should gains. (Smith International closed on Friday at $33.31.)

    Pat Dorsey: This is a high quality firm in a pretty tough industry, but it is way too pricey.

    Tobin Smith: I really like oil refiner, Frontier Oil (FTO). Investors aren’t making money buying light sweet crude; they are making the money buying sour crude oil. This stock is worth $60. (Frontier Oil closed on Friday at $44.35.)