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Bulls & Bears
This past week's Bulls & Bears: Gary B. Smith, Exemplar Capital managing partner; Tobin Smith, ChangeWave Research editor; Pat Dorsey, Morningstar.com director of stock research; Scott Bleier, HybridInvestors.com president; Bob Olstein, Olstein Funds president, and Tom Adkins, Re/Max Fairlawn real estate agent.
Trading Pit: War on Terror Saving Lives and Stocks
A major terror bust in Miami with the Feds nailing seven Muslim fundamentalists who thought they were doing al-Qaeda's dirty work. According to the FBI, their plan was to hit several targets, including the Sears Tower in Chicago.
Is the War on Terror saving lives and the stock market?
Tobin Smith: Yes! We are winning. Arrests like these and killing Zarqawi are making people safe. The stock market needs this and this news is helping. We forget how strong our people are and what a great job they are doing.
Scott Bleier: We are winning War on Terror and this is money well spent. However, the market doesn't care. It is looking at the economy, interest rates, and corporate earnings. We are bigger than 9/11 and any terror attack.
Gary B. Smith: The War on Terror is definitely saving lives and the market. This plot could've killed hundreds and thousands people. If we awoke to news that this tower went down, the Dow would have fallen a thousand points. The consensus would have been that we're no better off than we were back on 9/11.
Bob Olstein: This is like asking the question if you value air. You don't value until you don't have it. Terrorism is a fear. It's my fear and I'm usually a guy who only looks at numbers. If there is a terrorist act on this soil, it will destroy price/earnings ratio, which is how confidence is expressed. We're doing a good job, but we have to get tougher. When I see demonstrations out in the street with people ripping the American flag and saying they want to kill us, it makes we think we have to get even tougher.
Pat Dorsey: If I woke up and the Sears Tower was leveled, the market would sell off, but it would come right back. We have a very large economy, and this is only a drop in the bucket. The market got hit very badly after 9/11, but it came right back. As tragic as 9/11 was, if you look at the economic impact over the last several years, was not that large. The short-term impact may be quite large, but the impact on the economy and the market over months and years, will be negligible.
More and more homes are going unsold. Spring and summer are usually the best times to sell a house. Is right now do-or-die for the housing market?
Tobin Smith: I've got bad news for you. As we said last March, if you bought a house in one of these hot areas at the top of the market, you're underwater. Ten to twenty percent haircuts on $750K-$2 million houses is the norm in the 26 markets we survey.
Tom Adkins: Housing has gone from the very best year in American history to the 5th best year in American history! Essentially, we are reverting back to a normal market. Some areas will be a little lower than others and some will be a little higher. This is a media driven event. Sales are down about 3.5 percent. What's the problem with that? If sales had continued at that rate over the past 3 years, every American man, woman, and child would own a home in 7 years. We actually need softer sales to prevent an enormous crash. Everyone needs to live somewhere. So somewhere, somebody is always buying a house, regardless of the market.
Bob Olstein: Housing prices are down ten percent and will probably slip some more. I agree with Tom that we are getting back to normal. The bullish thing is that it's taking the steam out of the economy. It could fix the inflationary expectations out of the economy and maybe stabilize interest rates. This would be very bullish for the market.
Gary B. Smith: The facts don't bear out the bursting of the bubble. The median price for a home has not budged since the beginning of 2006. It's gone up and come back, but overall has remained pretty flat. It's unlikely that we'll see a big bursting in the housing bubble because we don't have a lot of unemployment right now. We've never seen a housing bubble burst without a lot of unemployment. Interest rates are up, but are historically low.
Scott Bleier: This is not do-or-die for the housing market. Homes are all about price, just like stocks, except it's more long-term. This is the only investment that the government pays you to own. The housing market is never going to be destroyed, as long as the government pays you. If you don't own a house, you're nuts.
Pat Dorsey: The aggregate home price statistics mean absolutely nothing. What are the three most important words in real estate? Location. Location. Location. Housing markets are local, local, local. You can have a house down thirty percent in Arlington, VA and I can sell my condo in Chicago in two weeks.
Want cheap stocks that could soon get a lot more expensive? Bob Olstein has the names of his best bargain stocks.
Bob Olstein: I'm starting to find valuation in larger companies. My first pick is McDonald's (MCD). My fund has owned this stock for a couple of years. Now, it's showing that it has a lot of earnings power. I love this company and think the stock is worth $40-45. (McDonald's closed on Friday at $32.60.)
Tobin Smith: He should own it. Can you believe the Asian salad is helping bring earnings back?
Pat Dorsey: At ten times cash flow, this is a wonderful company. I like it.
Scott Bleier: Bob, sell it. McDonald's has had a great turnaround and it's still a quality company. I would just take your profits now.
Gary B. Smith: The stock's been sliding down for months. I'd avoid.
Bob Olstein: Next up, 3M Company (MMM). This is an old-fashioned conglomerate and multi-industry company. Plus, new management just came on board. I see it going to $95-100. I own 3M too. (3M Company closed on Friday at $79.92.)
Pat Dorsey: I love it too! Bob, we were separated at birth.
Scott Bleier: Good company, but if the economy slows down it's earnings power drops as well. I would not own it here.
Tobin Smith: I'm bullish.
Gary B. Smith: I like it. The stock broke out and came right back to support. Now is the time to buy.
Bob Olstein: American Express (AXP) was a recent purchase by my fund. It's now starting to get into the banks. This is an outstanding company with outstanding management. It's set to hit $70. (American Express closed on Friday at $52.59.)
Tobin Smith: I think it will actually benefit from the lawsuit with Visa and Mastercard. It's probably going higher from here.
Pat Dorsey: I love these guys! 30 percent return on equity. This is one of the 10 best companies on the planet.
Scott Bleier: This is a great company and a great buy for investors.
Gary B. Smith: Leave it to a black card owner to love American Express. For everyone else, the stock doesn't look so great. The stock is stuck and not doing anything right now. I'd avoid it.
Tom Adkins' prediction: Stocks zoom higher after GOP wins big in midterms
Bob Olstein's prediction: S&P 500 gains 10 percent by the end of this year
Gary B. Smith's prediction: Superman lifts Time Warner (TWX) up 20 percent by 2007
Pat Dorsey's prediction: HCA (HCA) makes very healthy gain of 40 percent by next July
Tobin Smith's prediction: Pioneer Resources (PXD) gets bought for 50 percent premium by fall
Scott Bleier's prediction: VeraSun (VSE) about to get hot; gains 50 percent by year-end
Cavuto on Business
Neil was joined by Gregg Hymowitz, founder of Entrust Capital; Charles Payne, CEO of Wall Street Strategies; Danielle Hughes, CEO of Divine Capital Management; Jon Najarian, founder of InsideOptions.com; Chris Lahiji, president of DailyTrends.com; Joe Battipaglia, CIO of Ryan, Beck & Co.; Charles Bobrinskoy, vice chairman at Ariel Capital Management.
Neil Cavuto: Here we go again. The New York Times and the L.A. Times revealing top secret information on how America catches terrorists. And they did it despite a strong request from the White House not to run the story. Is it time to prosecute before more Americans are killed and our economy takes another blow like 9/11? Joe, you say we need to go after the people leaking this stuff, right?
Joe Battipaglia: Absolutely. Let's go after them. These are classified programs. They're in the country's national interest for our national security. They're violating a presidential directive. We should go after them and punish them to the entirety that we can.
Neil Cavuto: And Jon, you would go even further.
Jon Najarian: I would include the newspapers. They completely ignored the White House and put all of us at risk. Al Franken said that Karl Rove is a traitor and should be shot for treason. Well, these guys put all of us in danger, and Neil I think that is just abhorrent. The New York Times does not care. They would sell their soul for an eighth of a page ad.
Dani Hughes: I don't know about that.
Neil Cavuto: Well, maybe a half a page ad.
Dani Hughes: We do have freedom of the press. And the fact is it's a business. We have to protect the freedom of the press. We can't allow the government to say ‘We want you to admonish everything here, and we don't want you to talk about this because of national security.' They tried to do that with Watergate; not that this is Watergate.
Neil Cavuto: But this is different. This is about killing people.
Charles Payne: The New York Times is disingenuous if they bring up the first amendment because at the end of the day we know that people want to know. And the Bush administration may have made some mistakes in the past with some of their programs. I think if you tell the American people that we are doing things to protect you, including listening in on your calls, we'll accept that. But you can't give people minute details on how this stuff is done. Then how will we catch the bad guys?
Chris Lahiji: I can't believe you all are talking about this. Everyone's sensitive because of the NSA wiretapping. We've already known this. Ever since 9/11 the government has done a great job of finding out financial transactions of terrorists. The reason why I don't like it is because they're not getting the warrants. They're not going through the judicial system. They're not following the laws that have been set in place.
Jon Najarian: They got subpoenas for this. According to the New York Times they did.
Neil Cavuto: What's at issue here is not so much getting the information but getting information that a terrorist could read and then say, "Oh all right. I don't want to go that route." That's the bigger worry.
Gregg Hymowitz: If you read the New York Times article, the Treasury official who cited the article ultimately cooperated when he found out the New York Times was running with the story.
Neil Cavuto: Well, he had no choice at that point Gregg.
Gregg Hymowitz: No, you have a choice to cooperate at that point. A lot of the quotes for this story are from that Treasury official who cooperated with that story.
Neil Cavuto: But Gregg, they want to make sure that, ok you're going to run with this crazy story. Then we want to make sure you get your crazy facts right.
Gregg Hymowitz: Hold on a second. It's not a crazy story. A lot of measures were passed immediately after 9/11 to make sure that nothing else was going to happen. The problem is a lot of these temporary measures contravene Federal law. I have no problem with the Federal government doing this kind of stuff. The only issue is you have to make sure the law allows you to do this.
Neil Cavuto: Joe, here's what worries me. Not how the information was gleaned, but that it's out there right now. And all of a sudden the whole terrorist world knows. We're worrying about our rights here. No one is asking about our lives.
Joe Battipaglia: During World War II there was the expression: "Loose lips sink ships." And in this situation, with the CIA and the FBI under constant criticism for potential leaking and working against the administration, this is another example of that. This is a very serious threat to our national security. It's outrageous that these leakers are allowed to do this.
Jon Najarian: The New York Times is all about getting their circulation up. But stories like this are putting lives at risk.
Dani Hughes: And we're talking about it right now. We're giving it airtime.
Jon Najarian: But it shouldn't be.
Dani Hughes: Then you have to change everything about this country and how business is run.
Chris Lahiji: This is old news. This is one of the ways they're trying to fight terrorism. I think most of terrorism happens in the black market. In the black market, they really have no circulation on that money. We still can't find the $10 billion that was lost in Iraq. This is just ludicrous to me. We've all known this.
Neil Cavuto: Charles, what do you think the long-term impact of this is?
Charles Payne: We have to draw a line. 9/11 wouldn't have happened if we weren't taught to be civilized. We would've bum-rushed those guys otherwise. But we're a civilized people. We have a Bill of Rights. We have amendments. We don't want to go against the Constitution. But somewhere along the way a line has to be drawn. We can't tell the bad guys how we're going to catch them.
Dani Hughes: But we can't become a closed society.
Charles Payne: But some things have to be kept top-secret Dani.
Dani Hughes: You have to follow the money to get the bad guys.
Neil Cavuto: We knew we were trying to follow the money trail, but now we've given them the blueprint.
Gregg Hymowitz: Everyone knows that there's clearing house for international financial transactions. That was no secret.
Neil Cavuto: Then why did the administration not want it revealed?
Gregg Hymowitz: They weren't viewing specific transactions, but instead they were casting a very big net and looking at thousands of organizations. And as Americans, that's what we should be concerned about.
Charles Payne: Don't you think we're going down a slippery slope here? Nothing is a big deal for you. You knew all this stuff. Chris knew all this stuff. Everyone did not know all this stuff. I guarantee you there's a guy sitting around this morning with an AK-47 who didn't know this stuff.
Gregg Hymowitz: You're right. We're going down a slippery slope. It's allowing these kinds of broad subpoenas and investigations without any Congressional or legal authorization.
Joe Battipaglia: Gregg's making a mistake by saying no one knew. The governments, the financial organizations, the legal remedies were all in place relative to this activity. The fact is they were capturing criminals for the last several years.
Head to Head
Neil Cavuto: When a mutual fund company known for making a fortune on smaller stocks starts investing in the big names, is that a sign you should as well? Time to go head to head. With us now is Charles Bobrinskoy, Vice Chairman at Ariel Capital Management. Big cap stocks in the last five years have gone up 2 percent, while small caps have gone up 65 percent. Charles, your firm is known for those smaller stocks but is now branching out.
Charles Bobrinskoy: That's right. Not only have small caps outperformed the last past five years, but they've outperformed probably over the last century. We have found now though that larger names look like they're cheaper.
Neil Cavuto: They have looked that way for a long time. What's the difference now?
Charles Bobrinskoy: You're right. Over time, small cap stocks tend to have a higher multiple. Right now the index from the large cap stocks is about twelve times, whereas the index on small caps is about sixteen times.
Neil Cavuto: So small caps Dani remain strong?
Dani Hughes: They've been strong since October of last year. We saw the correction recently. That's why the street has been looking to get into something safer and bigger. The real point now is to look at the value in the big cap stocks. And to look into what's going to continue to grow.
Charles Payne: The only way these large caps outperform these small caps is if we have a tough market. I think the market still rewards the ability that small caps have to expand markets exponentially.
Charles Bobrinskoy: The distinction we would make would be quality over quantity. Lower quality companies, some very highly leveraged companies, have done really well in the last three or four years.
Neil Cavuto: Such as?
Charles Bobrinskoy: Leveraged companies have taken advantage of dropping interest rates. The junk bond market has rallied for four years. People with bad balance sheets have done fine. But as rates rise that can change.
Joe Battipaglia: The speculative froth in the market is being driven out by the higher rates. Now it's all about cash flow, earnings yields and growth.
Gregg Hymowitz: It's always about cash flow. I'm not exactly sure what Charles is talking about. The S&P trading at 14 times next year's earnings is cheap. S&P's large caps stocks would probably make sense.
Neil Cavuto: This isn't a sign by the way that you're giving up on small cap stocks?
Charles Bobrinskoy: Absolutely not. We have 99 percent of our assets in small and mid cap.
More for Your Money
Neil Cavuto: The five best stocks to own this summer? Time to get more for your money. Dani?
Dani Hughes: I like TEVA Pharmaceutical (TEVA). It's a generic drug company. They just won a big deal in court on Friday against big drug companies because they're going to release Zocor, which is a huge Merck drug. The stock got hit hard last week and the week before. TEVA is trading at a great multiple. I think it's good for a nice pop this summer. We own shares. It closed at $32.19.
Joe Battipaglia: It got hit because it had low guidance for the year. They're having trouble digesting a big acquisition. And I don't think you're getting paid well enough to take the risk.
Neil Cavuto: All right. Charles, what do you like?
Charles Payne: I like NetEase.com (NTES). It's a Chinese Internet play. It is a very volatile stock; so let me add that caveat. But when this breaks out it's going to be huge. My clients own shares. It closed at $22.02.
Jon Najarian: I do think it's going to break out. Charles is right but he just might be early. There are 200 plus cities in China and 2.5 million people. I don't like the multiple where it's at right now. I'm going to try and buy it cheaper.
Neil Cavuto: All right. What do you like right now?
Jon Najarian: I'm buying Advanced Micro Devices (AMD). This stock is cheap. It was in the forties earlier this year. It's in the mid-twenties right now. It'll be one of the hot stocks of this year. It closed at $25.14.
Gregg Hymowitz: It's cheap for a reason. Pricing is coming down. Earnings estimates are coming down. Customers are delaying orders because they know they're going to get cheaper prices for processes in the future. The valuation may be attractive, but I think it's a stock that has a lot of issues.
Neil Cavuto: Joe, your stock?
Joe Battipaglia: Microsoft (MSFT) has a free cash flow yield of 6 percent. They have a new product coming out in year-end. A change at the top might be good for this company. We own shares. Microsoft closed at $22.50.
Charles Payne: Joe is great, but he's guessing right now. It's a hunch. This is a rudderless ship right now. The reason they're in new management is because they've had a lot of miscues and missteps. I'd rather start to see it actually do some things and have it get a product out on time before buying the stock.
Neil Cavuto: And it's been this way for a few years, right?
Charles Payne: Right, a long time.
Joe Battipaglia: The stock will be $30 before we see that Charles. In which case you missed a good part of the move.
Neil Cavuto: Gregg, what are you doing?
Gregg Hymowitz: If you think the stock market is cheap, one of the ways you can play it is, and a stock we own is, Charles Schwab (SCHW). It's probably one of the best asset gatherers in the business today. It's now over $1 trillion in assets today. I think the earnings estimates are going to be on the upside in 2007. The stock is down a fair amount recently, but we like the stock and we own a fair amount of it. Schwab closed at $15.34.
Neil Cavuto: And you're basing that on more individual investment participation?
Gregg Hymowitz: Yes and that the market does better. And they're able to increase their assets.
Dani Hughes: They did just come out with an options screener and they lowered their commission rates at Schwab. It's the summer time, and that's when the market slows down, and I think their transactions will slow down too. So I don't think it's the time to buy.
FOX on the Spot
Joe: Good news ahead for market; stocks hit new highs!
Charles: Fed chief Bernanke is like kryptonite for stocks
Gregg: Sorry Charlie; Bernanke is good for stocks & economy
Chris: Google insiders getting out; down 25 percent by year-end
Dani: Oracle back on track; up 30 percent in 12 months
Neil Cavuto: Security leaks will keep coming, and the threat will keep growing as newspapers keep reporting. In the name of a scoop, they'll bury us all!
Forbes on FOX
Flipside: Drop Sanctions and Do Business With North Korea!
Lea Goldman, associate editor: Sanctions against North Korea haven’t worked. They are an ideological weapon and in no way are an effective global policy in dealing with this nuclear threat. Instead of invading, lets invest in North Korea. They are a mineral rich country and they are decades behind industrialized western nations. If we go in there and give Kim Jong Il a financial reason to ally with us, we could create a friend not a foe.
Steve Forbes, editor-in-chief: We can’t talk to this guy. Thugs don’t deserve hugs. Here’s a country that violates agreements, develops nuclear weapons and starves its people. If you reward bad behavior, you get bad behavior. Look at Cuba, even though we’ve tried to isolate them, other countries have invested in Cuba and it’s still an authoritarian dictatorship and still killing its political prisoners.
Dennis Kneale, managing editor: Cuba shows exactly why we have to do business with North Korea. Capitalism is the fulcrum of foreign policy. China owns a quarter of a trillion dollars in U.S. bonds. They can’t afford to put the American government out of business. When you do business with your enemies you end up having more of a relationship and they end up having a financial incentive to behave.
Rich Karlgaard, publisher: Whom do you trade with? There’s no private enterprise in North Korea. Any trade proceeds are going to fall into the hands of kooks, nukes and prostitutes.
Quentin Hardy, Silicon Valley bureau chief: We’ve had no relationship with these guys for 50 years. The same dumb thugs are in power. They’ve built nuclear weapons and they’ve enslaved their own people. Now they’ve got this missile going on. With contact we would have been giving them capitalism, we would have created a capitalist base, we would have corrupted them and put them out of power.
Jim Michaels, editorial vice president: They are like a spoiled kid who throws a tantrum. You don’t give this kid ice cream, you tell him to behave himself. Anything we do now to reward them will only corrupt a rotten government.
Dennis Kneale: We do plenty of business with Russia and they have nukes.
Jim Michaels: The Chinese have liberalized their economy and opened it up. Then we started to do business with them. We can’t do business with a Stalinist state.
Lea Goldman: It’s not about rewarding North Korea. It’s about capitalizing on opportunity. There is a huge amount of opportunity there for American businesses.
Steve Forbes: Did trading with Hitler change his behavior before WWII?
Rich Karlgaard: Russia and China are moving in the right direction. They’re blossoming capitalist societies. Cuba and North Korea hate capitalism. That’s why they are at the bottom of the list. There is nobody to trade to. All the money would wind up in the hands of the dictators.
Quentin Hardy: When we first went into China it was the tail end of the Cultural Revolution. That was a bad place. Working with them has changed them over time and now they are moving towards capitalism.
Steve Forbes: It didn’t work in China until 1978 when Deng Xiaoping made a decision on his own that China was going to liberalize and modernize and that opened their economy up. He made that decision, not the U.S.
Jim Michaels: North Korea needs to make the first step. Then we can talk to them.
Lea Goldman: Sanctions against North Korea only strengthen Kim Jong Il’s resolve against us.
Steve Forbes: Since 1994 we’ve cut agreements with North Korea, we gave them money and aid. What have we gotten for it?
Quentin Hardy: We should have dialog.
Dennis Kneale: Look at South Korea, 70-80 percent broadband penetration today. Booming economy. North Korea looks down and sees what their sister has and they want some of that.
Rich Karlgaard: Deng Xiaoping said to get rich was good. When I hear Castro or Kim Jong Il say the same thing maybe I’ll be a believer.
Dennis Kneale: Hasn’t North Korea asked us to come talk to them about this nuclear stuff. The former Israeli Prime Minister Shimon Perez said one of the mistakes he made was not talking enough to his enemies. We should sit down and talk and do business with them.
Jim Michaels: What are you going to talk to them about? They’re not willing to take the basic steps that will help feed their own people.
Steve Forbes: In 1994 we gave them money and offered them food, gave them oil, gave them nuclear technology. And what did we get? More bad behavior.
In Focus: Miami Terror Bust: Proof Government Should Spy on Americans?
Mike Ozanian, senior editor: This terror bust supports the case that surveillance works but it does more than that. It shows how important it is to have a President who is vigilant against terrorism, who is out to get them. This instead of a Clinton who had his head in the sand while we were constantly being attacked.
Quentin Hardy: According to the Attorney General, these terrorists didn’t really have a plan and didn’t really have any weapons. They were sleeping in a warehouse and we’re not sure if they even had phones that we could tap. These guys were losers. They were turned in by their neighbors most likely. This is not a serious terrorist threat.
Steve Forbes: We do need a sensible domestic surveillance program for suspects infiltrating organizations and to find out their communications. We saw in Canada a very real attempt. In London they were successful. So domestic surveillance during wartime is something we need to put up with.
Victoria Barret, associate editor: London is a perfect example, they have tons of surveillance but it didn’t do anything to stop those guys from blowing up the subways. Surveillance is a very inefficient way to catch these guys, instead we need to get inside these terrorist organizations. We need to follow the money. This Miami case is classic. They were doing military workouts at 3 a.m. It doesn’t take wiretapping to figure out that that is just not normal. The neighbors saw this. That’s the clue here that surveillance isn’t the answer.
Jim Michaels: As far back as the Oklahoma City bombing we learned that being an American citizen doesn’t guarantee that you are not a terrorist. We’re faced with this new threat of domestic terrorism. Unless we allow the feds to probe into the lives of American citizens, as well as people abroad, we’re not going to be safe.
Elizabeth MacDonald, senior editor: We are at war with an enemy who thinks beheading people is their religious duty. We’re not talking about spying on Americans, we're talking about spying on terrorists. We’ve also used warrant-less searches in drug trafficking and with mob related activities.
Mike Ozanian: You have to use surveillance on everyone today because you don’t know who’s part of the terror cell and who isn’t. We’re talking about seeing whom these guys are talking to. We’re talking about connections with phone calls. People are humans who are doing this, they are going to make mistakes. But I’d rather be safe than sorry. And the fact that we haven’t been hit since 9/11 shows that we are on the right track.
Quentin Hardy: You’re saying that they are not spying on Americans, that they’re spying on terrorists! They’re scooping up numbers and names wholesale. These people are using excuses to incite fear so you’ll sign away your civil liberties.
Jim Michaels: U.S. citizenship should shield you from surveillance? That’s nonsense.
Elizabeth MacDonald: There’s a serious libertarian privacy issue here. I think we need to be careful of who is calling the shots. The real issue is we’re not doing anything to secure our borders. We’re spying on the inside but not doing anything to keep these guys from coming in and possibly doing great damage.
Victoria Barret: The fact is, we’re building a huge bureaucracy that doesn’t do an efficient job of protecting our citizens.
Steve Forbes: In wartime we have to be able to look and see who is doing what. And make sure we can pursue them and infiltrate them if there are connections. If we see suspicious patterns of behavior we need to pursue it. This is not peacetime.
Informer: Celebrity Stocks
Lea Goldman: Of all the celebrities on the Forbes Celebrity list, I like David Beckham, the soccer player from England. He’s the pitchman for Procter & Gamble (PG), which is a great defensive play in a volatile market. Everyone is still going to use shampoo and detergent even when the market tanks.
Mike Ozanian: To me all detergent is the same. Don’t bank on Beckham. He’s past his prime. I like Halle Berry, she’s pushing Revlon (REV).
Lea Goldman: All you have to do is walk through the supermarket aisle and see that Revlon is losing market share.
Dennis Kneale: I like P Diddy and Warner Music Group (WMG). The company also owns The Eagles backlog. It went public at $2.6 billion in value, it’s now worth $3.9 billion. Its rival EMI has already bid 8 percent more than that to takeover Warner Music. EMI will pay more and the stock will go up more.
Victoria Barret: I like P Diddy, but not this stock. It’s too pricey over these takeover rumors. I like Motorola (MOT), Maria Sharapova serves it up for them. They are coming out with a Q phone. People in Silicon Valley are raving about it.
Dennis Kneale: This is a great company and it is undervalued, but the RAZR phone's popularity is its biggest enemy. It could fade just like that.
Makers & Breakers
• Hilton Hotels (HLT)
Tracy Byrnes, New York Post Business Writer: MAKER
Hilton recently merged with Hilton International. Now Hilton is positioned to takeover Europe. So in the next 12 months, that’s when we are going to start to see the real money. I think it will go up to $35 in one year. (Friday’s close: $26.87)
Elizabeth MacDonald: BREAKER
This thing has more debt charges than a Paris Hilton credit card. Their debt has more than doubled.
Rich Karlgaard: MAKER
It's a great brand and they’re hedged in both resorts and business properties.
• Diageo (DEO)
Tracy Byrnes: MAKER
These guys have great products like Johnnie Walker, etc. They’ve got a great dividend yield and a lot of cash. This is a good solid company coming up in the future. I think it will go to $82 in one year. (Friday’s close: $66.70)
Rich Karlgaard: BREAKER
The sales growth has flattened. The stock has doubled, which is usually the sign of a stock that is going to pause.
Elizabeth MacDonald: BREAKER
It has really flat revenue growth over the past five years. This is also a stock that is going to get hurt by higher interest rates and a weaker dollar.
Tracy Byrnes: This is a good one to hold. Again this company’s got a lot of cash, a dividend yield and earnings to support that dividend too. People are going to be looking to that in the coming months when things are unsettled. They’ll be looking for a good dividend and a solid company.
Our "Cashin' In" crew this week: Wayne Rogers, Wayne Rogers and Company; Jonathan Hoenig, Capitalistpig Asset Management; Dagen McDowell, FOX Business News; Jonas Max Ferris, MAXfunds.com; Mike Norman, BizRadio Network; Meredith Whitney, CIBC World Markets; Gary Kaltbaum, Kaltbaum & Associates, and Adam Lashinsky, Fortune Magazine.
Stock Smarts: Troop Pullout in Iraq: Good or Bad for Stocks?
If U.S. troops pulled out of Iraq this weekend, what would stocks do Monday morning?
Mike Norman, BizRadio Network: The market would collapse for two reasons. First, from a geopolitical standpoint, it would be an unmitigated disaster. It would create the very civil war that Senator Reed is saying we are going to avoid if we pull out. It would portray the United States, once again, as a paper tiger only capable of getting mired in these Vietnam-style conflicts. The second thing is this: it's economic. Look, let's face it. Over the last three years we have spent four hundred billion dollars. That has been an enormous stimulus. Now I am not advocating war as an economic stimulus, but it's undeniable. Same thing happened in World War II. When we came back, the market went down.
Wayne Rogers, Wayne Rogers and Company: I think that if you want to cause wars just to have a good economy, I think that you are out of your mind. You are saying that's fallout for it, not a reason for it. No, the market would respond very positively if we were to disengage in Iraq. Everybody would like that. It's good for the economy, it's good for the stock market, and it's good for the political situation here in the United States.
Dagen McDowell, FOX Business News: Wayne, there is no way it would be good for the stock market. To Mike's point, it would be a sign of weakness to the rest of the world. It would rattle our position as a superpower. But then, it would also rattle confidence in this country. Do you think that Americans would really feel good if we cut and run? No way. It hurts confidence here; it hurts stocks.
Wayne Rogers: I did not say cut and run. I said disengage. That does not mean cut and run. You listen to the commanders on the scene and they tell you what the military situation is. The political situation is the one that I am addressing, the one that says the basic policy is fundamentally wrong. Let the Iraqis, and the Iranians, and the Middle East fight each other. We are an "air and sea" power.
Jonathan Hoenig, Capitalistpig Asset Management: Well, the reason we should be there is to protect Americans, not to spread democracy or better the lives of Iraqis. One billion dollars wasted, forget four billion wasted, and one American life is wasted if it is killed so that an Iraqi woman can wear a burka.
Wayne Rogers: Jonathan, you are right. You are absolutely right in the sense that we should not be over there to spread democracy.
Mike Norman: Why don't we go back to communism then? That was great too, right? This whole global expansion which you guys have been talking about for so long started back in 1989 when the wall came down in Germany.
Meredith Whitney, CIBC World Markets: We all know that the economy here cares so much about the price of oil. If we pull out of Iraq, there is dissension in Iran anyway. They are going to invade Iraq; the price of oil will go through the roof, not to mention the fact that the U.S. looks like a failure, so rates rise across the board. It is a nightmare.
Jonathan Hoenig: Foreign policy cannot be dictated by the market.
Jonas Max Ferris, MAXfunds.com: Whoever is in charge of Iraq down the road is going to sell oil because that is the human resource of revenue at this point. If we were to leave this weekend, the market would go up Monday because it didn't mean that democrats did it, it is because the President or generals pulled us out. That happens because things are getting better or we think that we can't do anymore. That would be a positive to stocks because it would be the end to a ten-billion-dollar-a-month cost.
Mike Norman: Don't think that that is all going over to Iraq, it is being spent right here on armaments, on military industry, on military industrial complexes.
Jonas Max Ferris: Mike, I totally disagree that the ten billion dollars is being spent here in the United States.
Mike Norman: We are practically not able to reconstruct Iraq because there is still so much violence going on. If there were no violence, we would spend more over there. But right now, it is being spent on the military and fighting the war.
Jonathan Hoenig: Mike, how much of the military spending has actually gone to fighting the war? We have spent a lot, but we have not fought a war with compassion.
Wayne Rogers: You could spend that money elsewhere, Mike, and get a much better return. We have wasted that money and you are absolutely wrong. We do not have to be at war to defend the United States, you know.
Terry Keenan: Meredith, Let's get back to the market here for a second. If we did pull out, what would the market do?
Meredith Whitney: I think clearly that it looks that the U.S. is a total failure. We have lost a lot of ground in terms of how the rest of the world looks at the U.S. That points pressure on a lot of other things, not to mention rates.
Dagen McDowell: Let's not lose sight of the fact that we have made a lot of progress. We have got Zarqawi dead, a new government in place- positive for stocks.
Mike Norman: Meredith, the Fed has been jacking up rates for two years.
Jonas Max Ferris: Forget the interest rates here for a second. The cost benefit of this war is way out of whack. It is called cut and run, but really what it is not throwing good money after bad. And when that stops, it would be good stock markets, and be good for the economy.
Dagen McDowell: When a company pulls a product off the market, the reputation of that company is not damaged unless that product was flawed. If we pull out of Iraq, it hurts U.S. reputation.
Jonas Max Ferris: Well, you can't say costs don't matter; it's all about the benefits.
Meredith Whitney: The fact is that Dagen makes an excellent point here. Is our policy flawed? If we don't believe that it is flawed, then we should stick to it and focus on the great things that have come from it, which are really spreading democracy though the region, really securing Iran.
Cashin' In: Defen$ive Play$
Those terror busts in Miami, a stark reminder that America's enemies want to hit us again. So what companies can keep America safe? Which defense companies that will give a lot of bang for the buck?
Gary's Defen$ive Play: Lockheed Martin (LMT)
Friday's Close: $71.31
52-wk High: $77.95
52-wk Low: $58.50
YTD Return: +13 percent
Gary Kaltbaum, Kaltbaum & Associates: I love Lockheed Martin (LMT). They have aircraft, missiles, everything under the sun and more importantly if North Korea decides to throw bombs at us, they have great missile defense system that will take them right out of the sky. I think that this will ramp up very quickly as soon as this bear phase gets out of the stock market.
Adam Lashinsky, Fortune Magazine: I like it for the most part. I think missile defense is the theme here, especially with what is going on with North Korea, and it is not too expensive. My only problem with it is that they are putting their rocket missiles together with Boeing. I hate to see companies merging major divisions. It just shows that they are not in control.
Terry Keenan: Ok, so what is your pick here?
Adam's Defen$ive Play: Raytheon (RTN)
Friday's close: $44.28
52-wk High: $47.39
52-wk Low: $35.96
YTD Return: +10.9 percent
Adam Lashinsky: It is the flip side of Lockheed; Raytheon (RTN). The stock is trading at 16 times earnings. It just launched successful missile tests in the Pacific. This is the one to own right now. The stock is not expensive and will do well, especially as things heat up in Asia.
Terry Keenan: Wayne, they laughed at President Reagan when he came up with this missile defense, but it seems to be the way to go. What do you think about Raytheon?
Wayne Rogers, Wayne Rogers and Company: I am not crazy about either one of those stocks, Raytheon included. I just think that there are better buys. Even though they are in the defense business, I do not think that they are the best picks.
Terry Keenan: So what do you think are the best picks then?
Wayne's Defen$ive Play: United Technologies (UTX)
Friday's close: $62.28
52-wk High: $66.39
52-wk Low: $49.20
YTD Return: +12.3 percent
Wayne Rogers: Well, I like United Technologies (UTX). Their earnings were up 19 percent. They are in the helicopter business and are the supplier of the F42 engine. I think that this is a better pick because this company is going up. The other two are going down.
Mike Norman: UTX is a good company, but I have to disagree on one point. I think that it is overvalued at this level. I would buy it if trades down lower, which I think it will. It is a great company though.
Mike's Defen$ive Play: Armor Holdings (AH)
Friday's Close: $53.40
52-wk High: $65.11
52-wk Low: $36.95
YTD Return: +25.2 percent
Mike Norman: I like Armor Holdings (AH). Believe it or not, it was a company that I recommended a couple of years ago on Bulls & Bears. It was in the high twenties, ran up to the sixties, and then pulled back. They are very important. They manufacture the armor plating to protect our soldiers.
Adam Lashinsky: I think that no matter what you think about the war, you don't want to be in armor because estimates are coming down on armor. The trend is wrong on the earnings performance. As I said before, the action is in missiles, not in the ground war.
Terry Keenan: Alright Gary, can you break the tie here. Do you like this one?
Gary Kaltbaum: Actually, I do. It is a higher beta stock. I think that it is a real good company and great business.
Cashin' In: Are Hedge Funds Driving Up the Price of Gas?
Hedge funds trade everything: stocks, bonds, even oil. Now some are saying that these investment vehicles are the reason gas is still $3 a gallon. Despite high inventories and a tame hurricane season, some estimate that hedge funds add a $15 premium to a barrel of oil. Jonathan, you run a hedge fund. Mike, you blame Jonathan for these high oil prices.
Mike Norman, BizRadio Network: In the last sixteen years, global oil consumption has risen 20 percent, but the price has gone up maybe threefold to sevenfold. The use of the instruments that the hedge funds use, like futures and options, have increased thousands of percent. Right now, the claim on oil is ten times the daily amount that is being pumped. And even if these funds now trade through exchange-traded funds or even if they are buying energy stocks, they were completely responsible for the run up in prices that has occurred over the last eight years. I cannot believe it has taken so long for us to focus on it. We are not looking at these speculators driving the price up.
Jonathan Hoenig, Capitalistpig Asset Management: You show a real ignorance Mike to what hedge funds are. A hedge fund is a legal partnership. Some trade in stocks, some trade in bonds. We don't even trade in oil, but even if we did, that is not causing the rise in oil prices. If anything, it is the environmentalists that are doing it. A man works to earn his money. Does he have the right to invest in this country or no?
Terry Keenan: But Wayne, Jonas and a lot of people don't have any problem when people are buying S&P futures when the stock market goes up.
Wayne Rogers, Wayne Rogers and Company: Correct. Jonathan is right. Your hedge funds have nothing to do with this. You have to have a pre-frontal lobotomy to mix up hedge funds with the price of oil. You might as well say, ‘OK, they have driven up the prices of the stock market and that is unreasonable.' They have driven up all of the prices. There is no connection between hedge funds and the price of oil.
Gary Kaltbaum, Kaltbaum & Associates: It is so fashionable right now to blame the hedge funds for everything. There is no direct correlation right now between hedge funds and the long-term price of oil.
Dagen McDowell, FOX Business News: Big investors, including hedge funds, have at least doubled their investments in the last three years in commodities, including oil. That has helped drive the price up.
Jonathan Hoenig: Look at the CFTC data and it will show that the big speculators are long about a 170,000 contracts at NYMEX and they are short about 130,000.
Terry Keenan: That's the commodity futures exchange you're talking about.
Jonas Max Ferris, MAXfunds.com: We're not saying it should be illegal, but we're saying that there have been 2,000 commodity funds started in the last few years. When they buy futures, it drives up the price. No one said it should be illegal. We just want to know why it is going on?
Mike Norman: Jonathan, look at open interest. On a daily basis, running on the NYMEX alone, there are about a billion barrels of oil compared to 84 million barrels a day being pumped. That's a claim, potentially, on 84 million barrels by people who want to own a billion barrels. And for you to say that that is not affecting price is lunacy.
Gary Kaltbaum: Hedge funds bet on both sides. They bet on the downside also. If they thought oil prices should be $40, they would be shorting it, sending it down to $40. This is just crazy talk. It's out of left field.
Mike Norman: The commercials are short, not the hedge funds. You check the figures.
Jonathan Hoenig: Last year, Citadel lost hundreds of millions of dollars being short; I believe it was on natural gas. Kaltbaum is right.
Terry Keenan: Dagen, these hedge funds do account for about 30 percent of all the trading on the NYSE, where a lot of individuals also buy and sell stocks. Is this something to worry about?
Dagen McDowell: It's not something to worry about. Jonathan, the hedge funds are partially to blame, but also demand. You've got demand going through the roof. Mike's wrong in the sense that demand hasn't grown enough in the past. It's about the future.
Question: "I read about a new mutual fund called the Blue Fund. It is going to invest in companies that contribute to the Dems. Smart idea?" — Matthew Euse, Needham, MA
Dagen McDowell, FOX Business News: Well, Terry, I don't care if you're blue or red or green. In general, these gimmick funds are never a good idea. The whole idea is that if a company gives to Democratic causes and the Democrats somehow get back in power, then these companies will benefit. Even if there is any minuscule benefit from giving to political causes, there are so many other things that will outweigh it like market forces affecting a company's business, the stock, you name it.
Terry Keenan: And even if the Dems win in November, they're not going to control the White House. Does this fund make any sense?
Adam Lashinsky, Fortune Magazine: No, it really doesn't make any sense whatsoever. I agree with Dagen. If there are things that you really can't abide by-a defense company because you're a pacifist, or a drug company that makes an abortion pill-that's fine, don't own it. But on the flip side, this isn't the best way to make money. You're better off going with a fund manager who's trying to make money and then give your profits to charity. That's the way to do something good.
Terry Keenan: Wayne, is this fund just a gimmick?
Wayne Rogers, Wayne Rogers & Company: They are both right. Adam is absolutely right. Why would you let a political bias influence your investing? Why would you let political bias control how you make money? That's just dumb.
Terry Keenan: We've had lots of disconnects on the show, today. Jonathan, what do you think?
Jonathan Hoenig, Capitalistpig Asset Management: It's an outgrowth of socially responsible investing, but I don't think it's a way to make any real money in the market.