DISCLAIMER: THE FOLLOWING "Cost of Freedom Recap" CONTAINS STRONG OPINIONS WHICH ARE NOT A REFLECTION OF THE OPINIONS OF FOX NEWS AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE WHEN MAKING PERSONAL INVESTMENT DECISIONS. IT IS FOX NEWS' POLICY THAT CONTRIBUTORS DISCLOSE POSITIONS THEY HOLD IN STOCKS THEY DISCUSS, THOUGH POSITIONS MAY CHANGE. READERS OF "Cost of Freedom Recap" MUST TAKE RESPONSIBILITY FOR THEIR OWN INVESTMENT DECISIONS.
Bulls & Bears
This past week’s "Bulls & Bears":
• Gary B. Smith, RealMoney.com columnist
• Pat Dorsey, Morningstar.com director of stock research
• Tobin Smith, ChangeWave Investing editor
• Scott Bleier, HybridInvestors.com president
• Joe Battipaglia, Ryan Beck & Company chief investment officer
Trading Pit: Housing Bubble Bursting Good for Stocks?
Have we seen the first signs of a housing bubble beginning to burst? In New York City, one of the country's hottest markets, the average price for an apartment fell 13 percent in the last three months.
What does it mean for stocks if this is the beginning of the end for the housing boom?
Tobin: This slow down in housing is good for stocks in the long-term. The “panic buy” is over. Last year, if your house was on the market for two days, you almost panicked. It was very extreme. Now, the market is getting back to normal. This is great for dividend paying stocks, which have become more attractive.
Joe: The bursting of the housing bubble is not necessarily good or bad for stocks. There is a greater wealth effect from home values than common stock portfolios. Investors that went through the stock market bubble ran to real estate. But if housing rolls over, I doubt that they’ll run to a risky asset class.
Tom: This has been one of the best housing years we’ve had in American history. I don’t think the housing bubble is bursting just yet. We need to remember what drives the stock market and what drives the real estate market. If people have more money, they will invest it in something. Net income is the number one driving force behind whether people invest or not.
Pat: I agree with Toby that some kind of slow down in the housing is a good thing. When any market gets too overheated, it doesn’t end in a good way. If there’s a slow down from a big pop, it’s good. However, I don’t think this will have an effect on the stock market one way or another. The wealth aspect that Joe was talking about does have a big impact on consumer spending. However, I don’t think people were using their extra cash to invest in stocks. They were buying motorcycles and powerboats.
Gary B: Every blip in housing isn’t the start of the end. In fact, the Philadelphia Housing Index shows that housing is still in a solid uptrend. Yes, it has come down a little off the peak, but it still looks like it is heading up. There’s a direct correlation between when housing prices drop and the stock market. The housing market burst in 1929 and again around 2000, right when the stock market started going down.
Scott: The housing market and stock market are intimately associated with the other. Manhattan real estate is up 40 percent over the past 2 years. The average co-op is over $1 million and a small pullback is long overdue. The economy, stock market, and the housing market have all become very inter-related. When one takes a hit, all of them take a hit.
We're putting it on plastic! Past due credit cards are at a record high so the Bulls & Bears each picked a stock that could make big gains and help pay off your balance.
Pat: I really like Constellation Brands (STZ), which makes beer, wine, and other alcoholic beverages. It owns Mondavi wines and distributes Corona in the U.S. The stock is pretty cheap and looks like it could hit $32 in the next year. (Constellation Brands closed on Friday at $23.53.)
Gary B: This stock has been way down and I think there will be more downside. Not a great pick.
Tobin: I’m short gas. A good way to play this is to buy Profunds Short Oil Gas (SNPIX). This is a mutual fund that makes money as oil prices go down. I think oil and energy stocks will get bumped down. I predict investors will make about 10 percent from this fund. Then they should trade it and go long energy stocks. (Profunds Short Oil Gas’ minimum investment is $15,000.)
Scott: This is a very interesting pick. There are 82 stocks that make up this fund, but 50 percent of the fund is made up of only 3 stocks. I don’t like it.
Joe: I’m paying off bills with drug company, AstraZeneca (AZN). Anti-depressants are the answer. It has shown good growth rates and it’s not tied to the economy directly. I own it. (AstraZeneca closed on Friday at $48.90.)
Pat: AstraZeneca is a solid company and I like its anti-depressant franchise a lot. However, there are other drug companies I would rather own right now.
Gary B: People with credit card problems will want to spend less and will turn to Wal-Mart (WMT). The stock is at a multi-year low. The company put Toys ‘R Us out of the toy business and it’s putting grocery stores out of business. (Wal-Mart closed on Friday at $44.03.)
Tobin: This is why you don’t want to own Wal-Mart. Selling groceries isn’t the best business for the company. I would let the stock get down to $30 and then buy.
Scott: Buy brewer and theme park operator Anheuser-Busch (BUD). The Federal Reserve is going to send the U.S. into a recession next year and this is the ultimate recession play. (Anheuser-Busch closed on Friday at $42.20.)
Joe: Anheuser-Busch is the major market leader, but it is having a tough time growing. I don’t see why you would buy it at this price.
Terror & Stocks
A terror plot aimed at New York's subways, but unlike prior threats, stocks did not sell-off. In fact, on Friday, stocks closed with slight gains. What message does that send to investors?
Joe: The message is that we’ve come a long way since 9/11. Investors have built some risk expectation into the market. It comes down to magnitude and frequency. Happily, terror has been infrequent and the magnitude has been minor.
Gary B: If there had actually been someone injured on the subway, the reaction may have been very different. Luckily, it was just a warning and was confined to New York City.
Tobin: When Americans are attacked, it brings the country together. From a political standpoint, we’ve been hurting and tearing ourselves apart. However we take care of each other very well when there’s the threat of an attack.
Scott: The market completely ignored the threat. We expect that there will be attempts and an eventual attack. If the subway was bombed, the stock market would go down on fear. People would stay home for two weeks and that would slow the economy even more. Americans understand this is part of the risk of investing. But if an attack doesn’t slow the overall economy, we come right back.
Pat: The market reacts to the unexpected. When we got hit on 9/11, it was the first time terror had hit us on American soil. That’s why the market went haywire. At this point, it’s not a question of if, but when. We don’t know if we are going to be hit next week, next month, or next year. We can’t stop it from happening so it’s built in the market.
Scott: Fed raises rates and pushes U.S. into a recession
Joe: Hurricanes make U.S. turn to nuclear energy!
Pat: Beware of companies using "Hurricane Alibi"
Gary B: Miers doesn't get approved due to crony label
Tobin: Bird Flu hits but won't become a worldwide epidemic
Cavuto on Business
Neil Cavuto was joined by Jim Rogers, author of "Hot Commodities"; Gregg Hymowitz, founder of Entrust Capital; Meredith Whitney, executive director of CIBC World Markets; Ben Stein, author of "Yes, You Can Still Retire Comfortably!"; Charles Payne, CEO of Wall Street Strategies; Stuart Varney, FOX Business News correspondent.
Neil Cavuto: A crisis much bigger than Katrina. It could be upon us in a matter of weeks. Is Wall Street worried about the bird flu?
Meredith Whitney: Wall Street is worried about it this week. It was a slow news week. We're about as prepared for a pandemic bird flu as New Orleans was for Hurricane Katrina. It would cost the government about $2 billion to prepare for this. But Wall Street is worried about this. It's been on the cover of most newspapers for most of the week.
Jim Rogers: If this is a pandemic all over the world, millions of people will die. That will cause the economy to slow down. Planes will stop running. People will stop traveling and it will be horrible.
Neil Cavuto: Do you think it's as big a deal as they're making it out to be?
Jim Rogers: Everyone's making a big deal out of it. Whenever the press makes a big deal out of something, it's rarely happened.
Gregg Hymowitz: I think it's out there and the president is out there taking precautions. There are new drugs out there. This has been a mild thing so far. This is really a blip right now.
Ben Stein: There's never been a case where a pandemic has ruined Wall Street. The market was worried about interest rates. And there is a medicine for this.
Neil Cavuto: Apparently other countries have asked for this medicine from GlaxoSmithKline (GSK) and they're working overtime to get it to those other countries.
Ben Stein: If they're working overtime that's probably a good thing for them. We should have stockpiles of it at hand.
Jim Rogers: You're saying exactly what needs to be said and that is that we're not ready.
Gregg Hymowitz: The question is, why is this going to happen in the next few weeks? I think the experts say this thing has still not mutated.
Neil Cavuto: Well, I think people are worried about this piece in an Asian newspaper that said it's spreading.
Meredith Whitney: But we just don't know. This is something that certainly erodes consumer confidence. What the Bush administration is trying to do is make sure Americans know we are as ready as possible.
Neil Cavuto: Bottom line is we're not. But Herman Cain, if it were to happen, I think people's investments would be the least of their worries.
Herman Cain: Yes; that would be the least of their worries. First of all, let's give the President credit for being pro-active. The difference here from disaster relief is the government has shown that in the past they do have the ability to find one mad cow and a chicken with the flu, so by the time it hits we'll be ready.
Stuart Varney: If you are an investor, how do you prepare for a threat you cannot quantify? What are you supposed to do? Sell all your stocks now? So an investor cannot really be prepared for this kind of thing. But I do think the government was prepared for Katrina until the levees broke.
Neil Cavuto: In 1918, 40 million were hit by that (bird flu). Are we now being nonchalant?
Ben Stein: In 1918, the general state of health was much worse than it is now. There were no anti-virals at the time. GlaxoSmithKline can ramp up and make much more of this medicine. And then we will be prepared. But it's an extremely unlikely possibility.
Gregg Hymowitz: I also think that Herman's point that the President is giving speeches and is being proactive doesn't really fly. I think you're point, Neil, is right. We should have a plan. Giving speeches is not enough. Unless you have a plan to address the traffic and hospitals, you've got big problems.
Neil Cavuto: Should we involve the military if it gets out of hand?
Herman Cain: If everything hits the fan it would be appropriate to bring in the military.
Jim Rogers: The military is already overextended.
Meredith Whitney: I think the military has shown time and time again that it's the best-trained outfit to help us in times of crisis.
Head to Head
Neil Cavuto: American's facing steep price hikes on everything from gasoline to Glad bags thanks to Rita and Katrina. Have we been blown all the way back to the hyperinflation of the 1970s?
Jim Rogers: I and everyone watching the show knows that prices are up. And the government is lying to us. Prices are going through the roof.
Ben Stein: There's never been a case of a storm causing massive inflation. We do have commodities driven inflation though.
Charles Payne: I cannot believe that a Fed governor would come out with such an outrageous statement. It's night and day between where we are now and where we were in the 1970s. It was the most irresponsible statement to make. In the 1970s, we had an average of 10 percent inflation every year. We had a real oil crisis back then and we had wages going through the roof. Of course prices are going up but we are so far from 1970s. Here we have the Texas Fed governor turning the stock market into the Alamo.
Gregg Hymowitz: I'm a big believer in global deflation. Can Katrina and other disasters cause temporary inflation scare? Sure, of course. The markets are volatile. I think globalization and deflation will be the bigger issues going forward.
Jim Rogers: But in the meantime prices of commodities have tripled in the last seven years.
Gregg Hymowitz: The prices of some commodities are actually coming down now.
Jim Rogers: Copper is at an all time high. Oil is at an all time high.
Meredith Whitney: Today, the American consumer spends about 3 percent of his wallet on gasoline versus 20 percent in the '70s. You have really large job creation where before you basically had no job creation.
Neil Cavuto: Well, you didn't have great job creation last month.
Meredith Whitney: On a relative basis you can say that job creation has been very strong.
Herman Cain: You can't just look at it on a one-month time frame. Let's talk about what we need to do so that inflation doesn't get out of hand. Yes it's creeping up but it's under control. Here's what we need to do: keep taxes low and Congress has got to stop spending like a broken water main.
Jim Rogers: You're right but it's going to take more than that to stop inflation.
More for Your Money
Neil Cavuto: Stocks that rise along with inflation... will they help you get More For Your Money? Herman, what do you like?
Herman Cain: We are definitely an eat and rise society. So, I like SuperValu (SVU), the largest wholesale food distributor in the world.
Gregg Hymowitz: The only problem is they just announced disappointing sales and slowing trends. So I would stay away from that.
Herman Cain: Gregg, that's short-term.
Charles Payne: I agree with Gregg that inflation won't be a big deal. It's a recession that I'm worried about. If we're talking 1970s inflation, I pick McDonald's (MCD). In the 1970s fast food became ubiquitous. We have two family earners. The whole lifestyle environment for Americans changed. If we see that again I think you'll see fast food chains do very well.
Jim Rogers: But this isn't the 1970s and everything McDonald's buys is going to be going up in price. I'd buy commodities.
Ben Stein: I love commodities. I think energy commodities in particular are going to be in short supply. Every productive Chinese worker in the world put together cannot create one more drop of oil. I would go for the iShares Goldman Sachs Commodities Index (IGE). It's heavily weighted towards energy stocks and it's a lovely thing.
Charles Payne: It's a great defensive play. It would've been a great play two years ago but I think if we get one more spike in oil and this is going to pull back.
Gregg Hymowitz: I'd buy gold stocks.
Herman Cain: As much as it pains me I agree with Gregg, but I wouldn't put all of it in gold. I'd put it in other things as well like food and commodities.
FOX on the Spots
Jim: Katrina turns Louisiana into a Republican state
Gregg: Miers is confirmed, but choice shows Bush is weak
Ben: Miers is confirmed, BUT conservatives won't be happy
Meredith: Beware credit crisis for recent homebuyers
Herman: Prescription Drug Program makes America sick!
Neil Cavuto: My FOX on the Spot is the deficit. It will get worse, and no one, including Wall Street, will care.
Forbes on FOX
Pay to Rebuild Gulf Coast by Cutting Taxes for Everyone?
John Rutledge, Forbes contributor: We need to make the low tax rates of today permanent. We'll not only get more growth that way but we might get a little revenue.
Dennis Kneale, managing editor: We have a deficit of over $300 billion despite the tax cuts. People say the deficit is going down, but the deficit is still the deficit. The government is spending 20 percent more than it brings in. That's a problem. Don't cut taxes when it's like that.
Steve Forbes, editor-in-chief: When you lower tax rates you create a more vibrant economy. When you reduce tax rates you get a better balance sheet, more assets and a greater wealth to rebuild the Gulf region, not to mention the rest of America.
Quentin Hardy, Silicon Valley bureau chief: Would it be good if you cut taxes to zero and increase spending infinitely? No! You have to find a balance. President Reagan cut some taxes, cut some spending, and raised some taxes elsewhere. In the case of Hurricane Katrina, what's wrong with having a little surcharge on gasoline for a while to help pay for the damage? The President wants people to conserve and higher gas prices will cause lower consumption because revenues will come straight in.
Elizabeth MacDonald, senior editor: A surcharge on gas will hurt poor people and the middle class much more than rich people. Taxes cuts have brought in about 60 percent of federal revenues during the past decade. But we have the attitude that we can do deficit spending. It's crazy. I think taxes should be cut in the middle class. They get hurt the most with taxes.
Lea Goldman, staff writer: While the President was cutting taxes and supposedly generating billions in revenues, he was starving infastructural agencies like the Army Corps of Engineer, which in turn starved the rebuilding of the levees. I think cutting taxes further loses the big picture here. You get what you pay for. And this President is notorious for not paying to get what we need.
David Asman, host: There's a lot of blame to go around on the levee issue. Back to taxes. We've had $200 billion more come in after the tax rate cuts.
John Rutledge: That's right. And not only that, the stock market is $3 trillion higher than it was before the rate cuts. There's a 15 percent capital gains rate. That's $250 billion of extra tax revenues.
Quentin Hardy: This is preposterous. You're saying that we have higher tax rates than we had in the recession of the Bush years. Yes the stock market is higher than it was in the depth of the recession and the terrorist attacks. But the stock market is a little below where it was when Bush started out.
Steve Forbes: It's no coincidence that the tax cuts of 2003 is when the economy really started growing again. The stock market has added $3 trillion since then. American households have a higher net worth today than they did when George Bush took office.
Elizabeth MacDonald: I believe in tax cuts for everybody, especially the middle class. Look what's happening in the 11 economies overseas who've adopted the flat tax. Revenues are starting to pour into Russia, Estonia… and now Greece is moving to a flat tax.
Lea Goldman: There's plenty of pork that can be cut on the other side. Why are we so quick to cut taxes? We can be more creative about creating revenues. We can cut spending. And not the spending that really hurts the middle class. For example, NASA plans on spending $44 billion on plans that stretch into the next two decades.
Steve Forbes: There's a lot of cutting that can be done. We're talking about revenues. How Washington spends the revenues is a different subject. We got a $10,000 raise; they went and spent $20,000. That's a spending problem, not a revenue problem.
Dennis Kneale: Tax cuts without spending cuts is a silly policy.
Steve Forbes: Why? Tax cuts make for a stronger economy.
Has President Bush Made Americans Richer?
Steve Forbes: Americans are doing better than they feel. When George Bush came into office we were in a recession, then we had 9/11. Even with those setbacks, America's household wealth is higher today than it was 4 or 5 years ago. The stock market has recovered, not as much as it should, but it's moving in the right direction. America is moving in the right direction. The reason is the tax cuts of 2003.
Quentin Hardy: The very rich, over $10 million have had an 8 percent gain. The slightly rich are also doing good at a 2 percent gain. Those in the middle aren't doing so well and those at the bottom are doing really badly. Here's the headline, under Bush, the rich got richer.
John Rutledge: That's not true. We've got a huge increase in net worth. Housing prices are up. 70 percent of Americans are homeowners. Give Bush credit for taxes. He blew it on spending. But a lot of this increase in value is because of technology and productivity gains.
Mark Tatge, Chicago bureau chief: I agree with Quentin. Real incomes have really declined. Household incomes have not kept pace with inflation. Even with an economic expansion, 3 of the last 5 years we've seen the average household income decline. You tell me that's prosperity? Many of the prosperity gains that were put through in the 1990s have not translated into wages.
Mike Ozanian, senior editor: The one number that sums up economic progress the best is net worth. It looks at all your assets and subtracts your liabilities. Now the difference is at an all time high of over $100,000.
Elizabeth MacDonald: The poverty rate has risen since President Clinton left office and it continues to rise steadily. I do give him credit for the tax cuts but I can't give him total credit for everything that's gone right as far as economic policy. Reagan set the stage with his tax cuts.
Steve Forbes: We've had these periods before where confidence is hurt by things like rising oil prices and the mishandling of the Katrina disaster. We did a cover story in 1992 -- "Why do we feel so bad when we are doing so well?” Perceptions lag reality. This country is in very strong shape.
Quentin Hardy: Steve, you like to look at gold as the barometer of economic health. If you look at the stock market's performance under Bush in terms of gold, it's down 40 percent since Bush took office.
John Rutledge: Bush is a cheap dollar guy and so is his cabinet. We should be looking for a strong dollar.
Elizabeth MacDonald: But saying that Bush is responsible for all of this is like saying that Lyndon B. Johnson is responsible for putting a man on the moon. The predecessors should take a lot credit for setting the stage.
Mark Tatge: Look at whom these tax cuts have benefited. They've benefited people with non-salary incomes. They don't benefit the average working guy.
Mike Ozanian: The President's job is not to make us richer. It's to go after the bad guys, which Bush has done a great job on and to keep the leeches in Congress at bay.
Elizabeth MacDonald: We still have 15 percent of the population without health insurance. That's not a positive sign of the economy.
Steve Forbes: Healthcare is a different crisis that has been mishandled.
Quentin Hardy: In response to Mike, most people don't think Bush is winning the war on terror and meanwhile he can't control anyone in Congress. Look at how they spend!
Get Rich Funds?
Victoria Barret, staff writer: I think to get rich right now you have to look abroad. I like the Vanguard Pacific Fund (VPACX). I like it because they have great holdings including Toyota (TM). They have a low cost and a low turnover. So you're not getting stuck with taxes, which is really important in mutual funds.
Mark Tatge: I'd be careful about going into any equities right now or increasing your equity exposure. Especially anything that invests in the Far East. This fund is heavily invested in Japan and that economy is dependent on what's going on in the rest of Asia and the U.S.
Victoria Barret: I think Japan is a great growth opportunity and their economy is really rebounding.
Mike Ozanian: I like the Fidelity Dividend Growth Fund (FDGFX). It's a great way to play the Bush dividend tax cuts. This fund is rated by Forbes as better than average in both up and down markets.
Mark Tatge: I like this better than the Vanguard Pacific Fund, but I'm still skeptical about equities. It's counting on whether they're going to be able to continue to pay dividends.
Mike Ozanian: I don't think dividends are a problem here.
Mark Tatge: I think you should either put your money under you mattress or invest in a gold fund because we're heading for some tough guys. I like the Franklin Gold and Precious Metals Fund (FKRCX). It's got low expenses and it invests in things other than just gold mining.
Victoria Barret: Gold is nice but at the end of the day it's not really used for anything today. Gold's price is based on what other's think it should cost.
Should Storm Victims Pay to Rebuild Their Own Homes?
Steve Forbes: You don't want people to build where they are going to be in harm’s way. In San Francisco, the government doesn't give you earthquake insurance. You take the risk building there. The same thing should be true in the flood plains. We encourage building in areas we know are eventually going to get hit because the government subsidizes them.
Lea Goldman: This is a bit unrealistic. 7 percent of this country is located in areas that are considered flood plains. It opens the door to not giving government aid to people who live on a fault line or in a tornado zone.
Victoria Barret: 7 percent might be a bit misleading, but the bottom line is that you don't want to incentives bad behavior. If you tell people that they'll get a check if they build on an area that can be flooded, you're encouraging bad behavior. I think we should step up and rebuild infrastructure, but it's not the government's role to rebuild people's houses.
Dennis Kneale: Do we have to be so cold hearted to say that when people lose everything they have no right to turn to the federal government to help them rebuild their lives? The port areas are often great areas of commerce. You have to let trade come and go. Government has a role to ensure that growth is stable.
John Rutledge: I use to live below sea level in New Orleans and advised the mayor that if you live below sea level, the water washes you away every once in a while. The government builds infrastructure. The government has social programs to help people when they get into trouble. Private property is private; the government should not replace it.
Lea Goldman: We went into Iraq and Afghanistan and said that those people's homes and livelihoods were worth bringing up and we can't even look in our own backyard.
Steve Forbes: It's one thing to give people assistance to rebuild their lives, it's another thing to have them rebuild in the area that was the source of the disaster in the first place. The government can help you rebuild, just don't do it in the wrong place.
Victoria Barret: I think we should encourage small business creation. I think we should rebuild schools. We should rebuild all the tools that enable people to have great lives. But homes are private property and that's not the government's role. I'm not saying neglect people at all!
Dennis Kneale: And then what happens when people who have lost everything don't have the money to rebuild? You have great roads with no houses!
Steve Forbes: We can rebuild the houses; just don't put them in a flood plain.
Dennis Kneale: There's thousands of homes and business there. You can't just walk away from them.
Lea Goldman: I'm worried about people getting back on their feet.
Will High Gas Prices Bankrupt America?
With the cost to fill many gas tanks topping 50 bucks, many Americans are using credit cards to pay at the pump. And late payments on those cards are already at an all-time high.
Could this spiral into a real money crisis for average Americans?
Jonathan Hoenig, Capitalistpig Asset Management: I think it could. I’m concerned. People are stretched way too thin. When I first got into this business, they said you should have 6-9 months worth of living expenses just sitting in cash. The fact that credit card delinquencies are up means that most people – I know our viewers all have that kind of money put aside – I think the average consumer doesn’t. Retail stocks look weak here. Housing looks weak and I’m concerned.
Terry Keenan: Dagen, it’s not just gas. We have home heating oil, natural gas, insurance payments – everything’s going up.
Dagen McDowell, FOX Business News: As Americans, we might be addicted to spending, Terry, but we’re not going to overdose on debt. Not to sound insensitive, but if you look at the top half of Americans, above the median income, those people have fixed-rate mortgages, they have paid off their credit card debt, and those are the people who account for the vast majority of consumer spending in this country. It’s not going to kill the economy, it’s going to hurt a little bit, but not kill it.
Terry Keenan: Not overdosing on debt is like saying that Kate Moss doesn’t have a cocaine problem.
Mike Norman, Economic Contrarian Update: Nobody’s going to say that gas prices haven’t gone up. Obviously they clearly have quite a bit. The data actually shows that the portion related to consumer purchases on the credit cards, as a percent of disposable income, has actually stayed relatively modest. The biggest chunk for every household is the mortgage payment, and that has gone up as a percent to an all-time high.
Terry Keenan: Which is also scary, with rates at generation lows. Wayne, are you worried at all about the consumer?
Wayne Rogers, Wayne Rogers & Company: I think everybody’s right here. Here is the point: If you’re talking about gas credit cards, as gas goes up in price the average cost of a credit card for gasoline is around 2.75 percent. But as the price goes from $1.50 a gallon to $3 a gallon, that’s a bigger chunk out of that buck. And that’s true all the way across the board. I think that the economy is going to slow down because of this. I said so last week when you asked me if I’m bearish.
Terry Keenan: Yeah, and 300 points later you’re looking good. Adam, what do you think about this?
Adam Lashinksy, Fortune Magazine: The issue isn’t so much gas cards as it is cards. Jonathan made one mistake. It’s not the average consumer; it’s the consumer on the margin. And those consumers, the less affluent people, are going to be a problem. By the way, the one sector we’re overlooking here are the banks. They’re the ones that lend recklessly by basically sending out a card to Mickey Mouse and to everybody’s pet dog. Have a look at JP Morgan (JPM) stock. It’s a downward ski slope. Or at Citibank (C), which has been choppy for the entire year.
Jonathan Hoenig: That’s a terrific point. And put Bank Of America (BAC) on that list. Put Fannie Mae (FNM) and Freddie Mac (FRE), who put anything mortgage-related – we’re back at DOW 10,500. We’ve been here for six years.
Terry Keenan: Are you short these financials, Jonathan?
Jonathan Hoenig: I can’t pull the trigger on that trade, but I wouldn’t touch most of them with a ten-foot pole.
Jonas Max Ferris, MAXfunds.com: It is a concern, though the Great Depression started partially because of massive layaway borrowing from consumers. But as far as them spending more money on gasoline, the problem here is that they’re not spending less on other things. It’s OK if gas prices go up, and people cut back on other spending, but look at Wal-Mart (WMT) and look at Target (TGT) this week. People are still spending there. So they’re just letting all this extra cost go into leverage. They’re not cutting back on other spending, and that is dangerous.
Mike Norman: Terry, you know one thing we’re not mentioning here, is the fact that the Federal Reserve has raised interest rates 11 times and they seem like they’re going to continue to keep that rate-hike campaign going. This has an impact on the cost of borrowing and on what you’re paying every month on your credit cards. We can’t leave that aside. Yes, gas prices have gone up, but look at what the Fed has been doing at the same time, tightening the screws.
Dagen McDowell: The vast majority of the people aren’t going to go broke because of the Fed, or because of gas prices. There is a strong job market.
Mike Norman: But what about mortgage rates? Mortgage rates have gone up and that is because of the Fed.
Dagen McDowell: But you’ve got a strong job market. More money is flowing into people’s hands because of that. That offsets at least some of the problem.
Terry Keenan: Wayne, what’s ailing to stock market then, if the consumer can make his payments and everything is OK?
Wayne Rogers: Well, I don’t think everything is OK. For years, in this country, we have promoted wild use of credit. Everyone advertises credit cards. The problem is there is a whole culture here of people who have lived on credit, who have never actually had to pay for anything. By the way, nobody ever pays off their house mortgage. All they care about is how much they’re paying each month. That’s what’s driving them to buy a house. They never pay it off.
Adam Lashinsky: Wayne, I agree with you, but that’s not what’s weighing on the stock market. What’s weighing on the stock market right now are fears of inflation. I think they’re largely unwarranted. In case anyone hadn’t noticed, the price of oil was down all week.
Terry Keenan: But it’s still up 50 percent this year.
Jonathan Hoenig: Yeah, and how did the price of gold do this week?
Adam Lashinsky: Absolutely, but that’s where we are. Comments from the Fed have gotten people worried about inflation, but inflation is not a major concern. I think we’re going to see that the market is going to do well for the balance of the year.
Terry Keenan: Is it a concern or not, Jonathan, because if inflation does pick up significantly, that’s just going to squeeze the consumer further?
Jonathan Hoenig: Let the economists talk about inflation. We don’t trade inflation. We trade the stock market. Let’s talk about the stock market. This week looked terrible. Fannie Mae, Freddie Mac, so many widely held stocks are really weak all of a sudden.
Terry Keenan: Anything look good to you?
Jonathan Hoenig: Gold looks good, Terry. I know no one wants to talk about it, but that was really the shining asset this week. Katrina opened my eyes. Most people are stretched way too thin. If you can’t go two weeks without cashing a paycheck – I think there are a lot of those stories out there unfortunately. That makes me really nervous.
Terry Keenan: Mike, you’ve been looking at some of these financial stocks also, and they’ve been worrying you as well.
Mike Norman: I happen to agree with Adam. I think the inflation outlook has been overblown. It’s primarily been an energy story, and I do think the Fed has overreacted and they’re going to continue. I think they’re going too far, and that is what’s creating this nervousness in the stock market.
Terry Keenan: Jonas, we’ve had a very warm fall, particularly in this part of the country, but home heating oil bills and natural gas bills are going to start coming in when we have to heat our homes.
Jonas Max Ferris: Yeah, and again, it’s OK because a lot of those profits go to U.S. companies. As long as you don’t buy the flat-screen TV because you’re paying more on the heating oil, (that money would have gone to South Korea), that’s OK. But it’s that they’re not cutting back. That’s the problem in the equation. They’re getting over leveraged.
Dagen McDowell: And all that nervousness about the heating bill coming up this winter, about gas prices, is already factored into the stock market. So, we’re ready for a rally here.
Terry Keenan: Are you ready for a rally, Wayne?
Wayne Rogers: I’m ready for a rally, yes. I would love a rally. You asked me last week and two weeks ago if I was bearish, and I said yes during that time. I don’t know whether this is a long-term thing or a short-term thing, but it is here. It’s something you have to deal with.
Terry Keenan: Are you holding onto your oil stocks, or were you shaken out this week?
Wayne Rogers: Well, some of them I have held onto. I still hold Chevron Texaco (CVX), I still hold Exxon Mobil (XOM), but I bought those stocks when they were $5, so I can’t sell them, pay the capital gains tax, invest the difference and make the same number. So, I’m going to hold those stocks.
Question: "I don't want to ever give up my SUV – can we start drilling for oil in Alaska?"
Adam Lashinsky, Fortune Magazine: Peggy didn’t say where she is in California, but if she’d like to buy my SUV, I’d be happy to sell it to her right now, because I don’t know what to do with the thing. This is just a dead argument. Nobody’s talking about drilling more for oil in Alaska. You know, the environmentalists have won this debate. We’re looking at ways to cut down on our use of oil, not go drill more in Alaska for a negligible gain.
Jonathan Hoenig, Capitalistpig Asset Management: But they haven’t won, and they’re so off base. Every piece of federally owned land should be sold off, certainly in Alaska. They care more about caribou than they do about Peggy or Americans, for that matter. And I think the environmentalist movement has shut down not only the drilling, but also the refining. And as I’m sure Wayne will tell you, that’s the real issue here.
Dagen McDowell, FOX Business News: The solution is somewhere between Jonathan and Adam. We need to drill. We need to set up more refineries, but we also need to conserve. This country has to start thinking about a gas tax and upping the fuel economy standards.
Jonathan Hoenig: No, no, no. Gas tax? You’re going to kill the people on the edge who are just making it.
Dagen McDowell: Stop sucking up the gas with those awful SUVs. We’ve got to stop driving them.
Wayne Rogers, Wayne Rogers & Company: I have been talking about this ad nauseam. It doesn’t have to do with drilling for more oil. It has to do with building refineries. They haven’t built a refinery in this country in 30 years. I don’t care if you discovered the entire Atlantic Ocean was full of oil. You can’t drive it through this bottleneck. Why are you even having this discussion?
Terry Keenan: Some more nuclear plants might help as well, Wayne.
Wayne Rogers: That too.
Adam Lashinsky: I agree with that.
Jonathan Hoenig: All we’ve got to do is shut down Greenpeace, and I’ll tell you we’ll get a big drop in gas prices. I promise you.
Dagen McDowell: And this country will be unlivable because the roads will be clogged with even more hogs.
Question: "I own shares of oil company XTO Energy (XTO). What do the hurricanes mean to these stocks?"
Jonathan Hoenig: Up until this last week, anything energy was golden. Frankly, I think the story is kind of out on this. Does he own it at a gain or a loss? I think that’s your first question here. How does his trade position actually look? I’m not inclined to run in here and buy this dip in energy shares because it’s been widespread, and right now I think cash is king.
Terry Keenan: What do you think, Adam? We had a shakeout of some of these stocks in the spring, and they came back.
Adam Lashinsky: Yeah, Terry, the hurricanes had their effect on oil stocks. In the future, the hurricanes themselves are not affecting them.
Question: "My financial advisor is pitching me on leveraging the equity in my home and reinvesting in stocks. Sound advice?"
Wayne Rogers: This is one of the worst ideas I have ever heard in my life. I cannot believe this. Hey man, this is your home! This is not some commercial piece of property that you’re out speculating in. This is your home. Do not do that. No! Bad! Terrible!
Dagen McDowell: Absolutely, Wayne. And by the way, there’s conflict of interest in this advice, because that advisor wants to get his mitts on the cash because he’s not making any fees or any commissions if it’s all wrapped up in that house.
Jonathan Hoenig: I’ll bet you $1,000 to charity that this guy is a registered financial advisor/stock broker. It’s amazing, Terry. They’re going after the hedge funds for being unregulated/unregistered. I’ll bet you this guy is a series 7 stockbroker, doing this kind of shady, stupid maneuver.
Wayne Rogers: Well, not only that, Jonathan is right. Jonathan is always talking against regulation. The federal government is trying to regulate, again, and instead of paying attention to the underlying fact, they think they can cure it with regulation. Stupid.
Adam Lashinsky: This guy is recommending gambling rather than investing. It’s exactly the wrong way to approach your investment. See to your home first, and then invest your retirement and the rest of your savings.
Is Wall Street Bullish on Harriet Miers?
Washington is already weighing in on Harriet Miers, but what does Wall Street think? Fred Barnes, co-host of “The Beltway Boys” joined the crew.
Fred Barnes: I think they (Wall Street) should be impressed. Here’s a woman who was a commercial lawyer in Texas, for years the most pro-business state in the country. Another thing that I think is important is that she was the domestic policy advisor in 2003, when President Bush pushed to reduce the tax rate on capital gains and on dividends to 15 percent, to drop it there. So, I don’t think you could get a more pro-business nominee than this one. Now we never know how they’re going to vote, because once they’re on the court, they are independent and they often do things that the president who nominated them doesn’t want, but just from the looks of it now, I think that you would predict that she would be a very pro-business justice.
Terry Keenan: So you think that Wall Street should like this nominee as much as they did John Roberts?
Fred Barnes: Even more, perhaps. We’re going to find out more in a week or two or three, when she comes before the hearings. The thing that I would look for is to see what she says, if anything, about the commerce clause, because that’s what Congress has expanded so much to get into areas partially affecting business that it hadn’t in the past.
Jonathan Hoenig, Capitalistpig Asset Management: Fred, how would she have gone on the imminent domain case? Sandra Day O’Connor dissented. Would she have done the same?
Fred Barnes: That’s something that you really couldn’t predict. I would think that most conservatives would be against taking those homes away.
Terry Keenan: Do you think she’ll be asked that question? Do you think she’ll answer it?
Fred Barnes: I think that she will be asked it, but she won’t answer it. Terry, there is a formula for getting through these hearings now, and it’s to say as little as possible and have this broad definition of what might come before the court when you’re a justice. Of course, it would be inappropriate to prejudge a case, but if you take the extremely broad view, and Roberts did, then you’re not going to comment on practically any case at all.
Jonas Max Ferris, MAXfunds.com: Everyone says Wall Street hates lawyers. Wall Street hates trial lawyers. This type of lawyer, Wall Street and corporations love. She’s a corporate lawyer, she’s been defending companies from class-action suits since the dawn of time; Microsoft (MSFT), the Texas Automobile Association – She is the most pro-business person you could have. She’s like the type of person they would have put up in the ‘30s, ‘40s and ‘50s into this post. She has no real judging experience, she’s really just a corporate lawyer, and on the corporation’s side. Suing people with bogus claims in class action lawsuits. Very pro-business. They brought her on not to overturn Roe v. Wade, they brought her on to help with tort reform and protecting corporations and all the things Jonathan loves.
Terry Keenan: Wayne, do you agree?
Wayne Rogers, Wayne Rogers & Company: Jonas, maybe I’m wrong, but I thought she was a litigator. I thought she was on the defense side. She wasn’t necessarily bringing the suits, but she was a litigator. What concerns me about someone like that is their mindset. The mindset of most litigators is to win a case, not to do justice. Justice and winning may not be the same thing, and in a country when one vote in 5-4 decisions decides what the law is for the rest of the United States, that’s a very, very weighty matter.
Terry Keenan: Fred, what do you think her chances are? How tough is this nomination process going to be?
Fred Barnes: I think it’s probably not going to be that tough. The truth is that there are a lot of conservatives who really have doubts about her, including some conservative senators that I’ve talked to. But at the end of the day, are they going to vote against her? Remember this Terry, almost all republican senators voted for Ruth Bader Ginsberg back in 1993 and Steven Breyer in 1994, both liberals. Can any of those now vote against a conservative, even if they think her credentials are not that great? A conservative like Harriet Miers? I don’t think so.
Jonas Max Ferris: Corporate America is going to call all of their favorite congressmen, democrat and republican, to back her. Watch how quiet they get about this lady.
Jonathan Hoenig: Who’s whispering more in her ear, corporate America or the religious right or the church? I mean, Fred didn’t this woman have a big, coming-of-age to the church kind of thing? This is a woman who could conceivably overturn Roe v. Wade.
Fred Barnes: She could, but there are many conservatives who could overturn Roe v. Wade, not because they care so much about the result, but they just think it was wrongly decided, wrongly argued, that the opinion was wrong. I think you could find a lot of them. You don’t have to be an evangelical Christian, though Harriet Miers is an evangelical Christian, I think that means that she has a generally conservative view on social issues in the country. I don’t know that that is very predictive of how she will rule as a Supreme Court justice.
Terry Keenan: Fred, the next big appointment for this president is the replacement for Federal Reserve Chief Alan Greenspan. Can you divine anything from the tealeaves about this choice and how he will go about picking Greenspan’s successor?
Fred Barnes: Well, the president was asked about this in his press conference a couple of days ago, and he said he wanted someone who was independent. Well, they always say that. That’s boilerplate. If you look in The Weekly Standard, you’ll see that we have reported that Alan Greenspan has recommended a couple of current Fed members as his replacement. One is Roger Ferguson, who I think is the deputy chair, and the other is Donald Cohen, who is a governor as well. They’re both people who are very opposed to the Bush fiscal policy. They don’t like tax cuts and I wonder how the Bush White House will respond to those recommendations. Remember, they pay attention to Greenspan. He highly recommended Paul O’Neill for treasury secretary. That didn’t turn out too well.
Terry Keenan: They got burned on that one. Do you think that might change their view this time around?
Fred Barnes: I think it might, yes.