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.
This past week's Bulls & Bears: Gary B. Smith, Exemplar Capital managing partner; Pat Dorsey, Morningstar.com director of stock research; Scott Bleier, HybridInvestors.com president; Tobin Smith, ChangeWave Research editor; Patricia Powell, Powell Financial Group president; Cheryl Casone, FOX Business correspondent and host of 'FOX Business Now' on Yahoo! Finance.
Trading Pit: Fed Moves to Help Banks; Stocks Rally on Friday
In comes the Fed -- up goes the DOW, surging over 200 points Friday after the Fed stepped in to help banks borrow money at a cheaper rate from the government. But that was after a rough and tumble week. On Thursday it looked like the bottom was about to drop out. Those losses were erased that same day. Have we seen the bottom?
Tobin Smith: On Monday people will find that we did in fact have a bottom. But that will be retested. If you look at the number of new lows vs. new highs, it's usually a good indicator. On Friday, we had eight new highs and over one thousand new lows! We clearly had a double bottom here, and we will probably reach it one more time. As the Federal Reserve begins to make a difference, you want to become a buyer certainly not a seller!
Gary B. Smith.: We need to retest the bottom. Thursday looked like that kind of blow- off bottom. We were down almost 350 points and then we bounced almost all the way up to close essentially flat. If we were really at a bottom, the market would have reacted a little better than it did on Friday. Yes we were up 200+ points. If people really took the Federal Reserve cutting discount rate to heart, and it was going to have that big of an impact, we would have seen maybe more like a 500 point up day. It was a limited reaction, which suggests that we need to go back a little, and test that bottom that we hopefully put in on Thursday.
Cheryl Casone: We did hit the bottom. On Thursday we saw that dramatic point drop and then it came back up, it because everyone said, "OK that's it"! All the hedge funds and institutional investors were out there bargain hunting, cause they though ok this is it!
Scott Bleier: We made a bottom, but not the bottom! We have been destroyed over the last month. There has been tremendous technical damage. That doesn't just end because we "whooshed up". The only people who made money in financials over the past couple weeks are the people who bought in the abyss on Thursday when we were down 350. We're back to where we were last week for a lot of these stocks, and they have a lot more work to do. We're going to bounce around here because we are really oversold, and there is more damage coming.
Patricia Powell: It probably was a bottom, and we will probably be tested. That doesn't mean it will be easy for the next 45 days; we could be bouncing all over the place. But we have seen if not the bottom, very close to the bottom. It's a great opportunity for people to get their portfolios in shape and a great opportunity to be out there nibbling away at things that you wanted to buy. This market has thrown out the baby out with the bathwater…there are a lot of good stocks out there!
Pat Dorsey: We currently have 250 stocks on our buy list, and we had 100 stocks on our buy list about three weeks ago. That tells me there are a lot more cheap stocks out there than there were, and it's time to go shopping. Bottom line is we had a very nasty credit crunch. But the underlying fundamentals of the economy have not been affected. If we got the same kind of credit crunch in the context of a weaker United States and global economy, all of this would be much different.
America and Our Markets: 'Stronger' Than Ever?
Tobin Smith: This is America! When the going gets tough the tough gets going! We've had corrections, and we will continue to have corrections. But the weather nor the correction is going to stop us!
Gary B. Smith: We've been through worse than this! However, if we remembered all the bad things, we would not be where we are today. We have short-term memories and we generally as a country tend to be optimistic. These are the two things that make you successful in this market.
Cheryl Casone: We do have a lot of things going on. Look at how fearful people have been about the markets. What if they stop spending; it could lead to a recession, and we've got hurricanes coming. We are dealing with a lot of things right now. Sometimes we aren't as resilient as we say we are going to be, at least in the short term. But we do always come back!
Patricia Powell: It makes us stronger. It's not the things we know about that hurt us. It's the bus you don't see coming that's going to kill you!
Pat Dorsey: When the market is fearful, that's when you want to be greedy. When the market is greedy, that's when you want to be fearful and start selling. Right now the market is fearful.
Scott Bleier: Throughout all of this fear, there has been no real panic. We are strong, and we are getting stronger.
Stock X-Change: Best Stock for Any Time Frame
In this crazy market, there is no one stock for everyone. So, whether your time frame is a month, year, or a decade, here are the stocks made for you!
Gary B. Smith: Bear Stearns (BSC)
Scott Bleier: Meridian Bioscience (VIVO)
Tobin Smith: Garmin (GRMN)
Patricia Powell: Abraxis Bioscience (ABBI)
Pat Dorsey: Energy Transfer Equity (ETE)
Cheryl Casone's prediction: Ho Ho No! China toy recall hurts Christmas spending!
Tobin Smith's prediction: Gas prices fall to $2.25/gallon in 90 days
Gary B. Smith's prediction: Countrywide Financial (CFC) overkilled! Doubles by 2009
Pat Dorsey's prediction: So many cheap stocks! Capital One (COF) gains 50 percent in 2 years
Scott Bleier's prediction: Be Safe! iShares Global Healthcare (IXJ) up 20 percent
On Saturday, August 18th, 2007, Neil Cavuto was joined by Ben Stein, "Yes, You Can Get a Financial Life" author; Charles Payne, "Be Smart, Act Fact, Get Rich" author; Tracy Byrnes, NY Post Business Writer; Peter Schiff, Euro Pacific Capital President; and Stuart Varney, FOX Business Correspondent.
Bottom Line: Perfect Financial $torm?
Neil Cavuto: Credit worries on Wall Street. Storms brewing in the Atlantic. The Fed trying to save the day. Are investors spooked? Let's get the "Bottom Line."
Ben Stein: The credit crunch is way overblown. The financials are being given away; they're so unbelievably cheap. Many of the research companies have gotten really whacked and are cheap at this point. The subprime problem is a problem, but it's a tiny problem in the context of this economy. The storm is a problem, but it's a tiny problem. Meanwhile, it's as if nuclear war has struck the financials and really struck the whole market. It's a buying opportunity, especially for the financials, maybe like I've never seen before in my entire life.
Tracy Byrnes: It is a buying opportunity. But, I think the subprime is a bigger problem because we have a confidence issue going on; it's affecting people's psyche about what to do in this market. We don't want them to pull out of the market. It is a buying opportunity and they can do really good things for their portfolios right now, assuming they have the stomach to get through it, because we're not done with this by any stretch. We don't know where the subprime-thing is going to take us.
Neil Cavuto: And that's pretty much where you are on this, right?
Peter Schiff: This is just getting started. It's not just subprimes. This is a problem for the entire mortgage industry. It's not just people with bad credit that committed to mortgages they couldn't afford. It's not just people with bad credit who are going to see their home equity vanish. And it's not limited to mortgage credit. Americans are going to have a difficult time borrowing money to buy cars, to buy furniture, to buy appliances. You know, foreigners around the world have been lending us money for years. They're now finding out we can't afford to repay. This is going to be an enormous credit crunch. The party is over for the U.S. We cannot continue borrowing to live beyond our means and consuming foreign products. It's over.
Neil Cavuto: You must be a laugh-riot at parties.
Peter Schiff: I'm pretty funny! I don't always talk about this stuff…
Neil Cavuto: Alright, Stuart what do you make of that?
Stuart Varney: I think it is a short-term buying opportunity. They'll get a nice bounce with these stocks, but long-term, I don't think you're going to see 14000 on the Dow any time soon.
Neil Cavuto: What's any time soon?
Stuart Varney: Oh… the next 3, 4, 5, 6, 7, 8, 9, 10 months. I don't think it's going to happen.
Neil Cavuto: That's a wide range there…
Stuart Varney: Well, I thought I'd give myself some room!
Stuart Varney: Long-term, this market is going to head downward because the economy is slowing and tax hikes are coming. You'll get a short-term bounce…
Neil Cavuto: We are going to be taking a look at the issue of tax hikes, going forward. Charles, what do you make of this issue that the subprime-thing has been overblown?
Charles Payne: Well, in and of itself, it certainly is overblown. But, subprime is not the problem. It never has been the problem. It's a symptom of the problem. What we really have on Wall Street is a lot of greed and arrogance. A lot of these folks, these hedge funds, lost their discipline. But, to Peter's point… I gotta tell ya, Peter's rant is always anti-American under the guise of financial advice. It's not true. Let me tell you, first and foremost, America is the strongest. When America's stock market was down this week, the rest of the world's markets tumbled a lot more. I'd be much more worried about an over-extended Euro that's way inflated than I would be about America's subprime.
Neil Cavuto: Peter, a guy with a yellow shirt just called you a fradycat.
Peter Schiff: No, it's not being anti-American. I'm just recognizing the problems of our economy. We are not the engine of the world's economy; we're the caboose. Sure, foreign markets went down along with ours, but it's because of the money they're losing on the money they lent us. It's because of the problems with U.S. dollar denominate, asset-backed debt that they own. It's because of us that they're ultimately going to shrug this off. The global economies are going to go up. The global stock market's going to thrive.
Charles Payne: Who are they going to sell their products to??
Peter Schiff: They don't sell products to us.
Charles Payne: Listen, all I'm telling you right now is you cannot take the U.S. out of the equation.
Peter Schiff: Yes you can! Charles, remember, we're not…
Charles Payne: Where's the proof of it? The global markets went off a cliff because we have a problem with the smallest part of our economy.
Peter Schiff: Charles, gimme a second. We're not buying the products of the world. They're giving them to us. They're subsidizing our consumption. When they let our currency collapse, foreigners are going to see the biggest boom.
Neil Cavuto: Let me get Ben Stein back in this. I know you're concerned about the dollar as a long-term worry, but do you think we're using this subprime issue as an excuse?
Ben Stein: I think the real market pros are shorting the hell out of this market. And I think this has been a speculator's wild holiday. Peter is right: There are long-term problems with the dollar, but we haven't defaulted on anything more than our most minute part of our obligation to foreigners. The dollar's still a perfectly trust-worthy currency. The dollar is the reserve currency for the entire world. So what I think Peter's saying there is a bit off the mark.
Peter Schiff: The dollar's down…
Ben Stein: But, subprime is tiny. Subprime is a tiny, tiny blip.
Peter Schiff: It's not tiny. And again, it's not just subprime. It's entire mortgage market.
Ben Stein: You're simply wrong about that.
Peter Schiff: No, I'm not.
Ben Stein: Defaults for the whole mortgage market are tiny.
Peter Schiff: Just give it time. Wait for all these mortgages to reset. Wait till people realize their homes are worth half of…
Neil Cavuto: Ok, so you're saying it's going to be bad.
Ben Stein: In the long run, we'll all be dead.
Tracy Byrnes: The problem is we hear from these traders on a day-to-day basis. Other business channels go down on the floor, hold the mic up, and ask, "How was your day?" And the trader says, "Horrible." It's not horrible!
Neil Cavuto: What are you doing looking at other business channels?
Tracy Byrnes: Doing research for the future, Neil.
Stuart Varney: I have lived in America for 32 years. And in each of those years there has been a trade deficit. And we've all been waiting for it.
Neil Cavuto: Have you been here legally?
Stuart Varney: Yes, I have a green card in this pocket.
Stuart Varney: We've not yet had a dollar crash and I don't think we're going to see a dollar crash any time soon. You're exaggerating.
Peter Schiff: No, we're gonna see one. Remember who's the one who predicted on this show that we're going to see problems in the mortgage market?
Neil Cavuto: Well, a broken clock is right twice a day…
Charles Payne: Aye, aye, aye.
Peter Schiff: I've been right a lot more than twice.
Neil Cavuto: Charles, let me ask you this. Is the message going forward "be cautious"?
Charles Payne: I don't know. We saw this last year. Not to the extremes of this year, but we've seen it year after year. The reality is that the fundamentals are absolutely great. And as far as a weak currency is concerned, everyone would like a weak currency… China wants a weak currency. Japan wants one. And the fact that Europe doesn't have one is hurting them tremendously. So if I'm looking to place money, I would love to buy American stocks on this dip. I'm not saying you have to buy everything Monday morning, but what I am saying is this is an incredible opportunity. We've seen this movie before.
Neil Cavuto: Ok, I want to step back and wrap this up. We had the Federal Reserve intervene and cut the discount rate, signaling that maybe cuts will be coming to other key rates… flooding the banking system with a lot of money to calm nerves. Is the worst over or is the worst yet to come?
Charles Payne: I think volatility is going to be here until we can look at the books of major financials. I think the worst is over.
Ben Stein: I think stocks will be a heck of a lot higher a year from now than they are now.
Tracy Byrnes: We have more volatility at least through September.
Stuart Varney: The big banks, the Central Banks, still have big guns to fire. They're fire them when necessary. The worst is over.
Peter Schiff: The worst is yet to come. The fundamentals are not sound; they're awful. If the fundamentals were sound, we wouldn't be having these problems.
More For Your Money
Neil Cavuto: It's not every day you get to buy blue-chip stocks at discount prices! But, our pros say you can do that right now. It's time to get "More for Your Money."
Ben Stein: Merrill Lynch (MER)
*Ben owns shares of this stock.
Charles Payne: St Jude Medical (STJ)
*Charles owns shares of this stock.
Peter Schiff: Newmont Mining (NEM)
*Peter owns shares of this stock.
Tracy Byrnes: Goldman Sachs (GS)
Head to Head: Is This the Time to Talk about a Tax Hike?
Neil Cavuto: Democratic presidential hopefuls still talking up costly programs on the campaign trail this week. They're also talking about tax hikes to pay for them. But, looking at the markets, is this any time to be talking about raising taxes? It's time to go "Head to Head."
Laura Schwartz: Well, I gotta tell ya, with all these politicians on the road talking about raising taxes, the enthusiasm for the Democrats is far beyond what it is for the Republicans. I think the people in America have a short-term memory. Look back at the Clinton Administration – and I'll say it again – the largest economic expansion in peacetime history, more than 22 million new jobs created, balanced the budget, tackled the deficit, and raised taxes. Wall Street liked him. Main Street like him. I think that's why right now you're getting a lot of enthusiasm for Democrats, even though they're being upfront and saying we're going to raise taxes on the rich and we're going to cut the taxes on the middle class.
Neil Cavuto: Ben Stein, what do you make of this? That maybe Americans will welcome this.
Ben Stein: Well, I think we can either raise taxes or have larger deficits. I prefer raising taxes on the rich. They'll still be plenty rich. They can have all the jets they want, all the yachts they want. Raise the taxes on the rich and use the money to lower the deficit and to raise pay for people in the military. It's outrageous that people in the military are so badly paid.
Neil Cavuto: If only we could get the government to focus on just that. But let's talk about this Stuart. What do you make about the timing?
Stuart Varney: I think it's very, very bad timing. But, I think regardless of politics, your taxes are going up. If the alternative minimum tax (AMT) is not reformed or abolished, it will hit 22 million people in April of next year. That's not going to happen. But, if they abolish it, they'll have to replace that revenue with higher taxes on capital gains or income. Your taxes are going up, no matter what happens politically.
Tracy Byrnes: But, when you tax things, you take money out of the system and that in turn slows the economy. It's money coming out of the market. How could that be the solution?
Stuart Varney: It's no coincidence that all the Democrats are talking about raising taxes, not a single Republican is talking about cutting taxes, and the market heads south and the economy starts to slow. There is a relationship.
Ben Stein: These things have nothing to do with each other!
Neil Cavuto: What has nothing to do with what?
Ben Stein: The fact that people are talking about raising or cutting taxes has nothing to do with market movement nowadays. It has everything to do with the supposed credit crunch that supposedly started in supposed subprime.
Neil Cavuto: Alright, well, Charles Payne, assuming Ben is right and we're making a bigger deal out of this than necessary and Laura's right that in the Democratic administration things were fine with higher taxes, what are we worried about?
Charles Payne: Well, I'm worried about politics of envy and pitting one American against another. The talk about raising taxes is sort of casting the American Dream in a negative light. This person is successful so let's get ‘em. Somehow he made millions at your expense. So anyway, I think it's bad. By the way, the AMT was initially after 150 people and now it's after millions.
FOX on the Spot
Charles Payne: Fed will cut rates by ¼ pt in September
Stuart Varney: Home prices in hot markets finally cool
Tracy Byrnes: Huge overseas sell-off, huge opportunity!
Ben Stein: Wall Street crowd acting like cry babies
Laura Schwartz: Karl Rove quitting proves Dems win White House
Neil Cavuto: Saying Goodbye to Chet Collier: Friend and visionary
Flipside: The Fed Should Butt Out and Let Markets Fall!
Neil Weinberg, Senior Editor: The Fed should let the market crash. The Fed has two jobs; to fight inflation and keep the economy going. Now hedge fund guys are losing their places in Greenwich, Connecticut and losing their Porches and what happens? The Fed comes along. This isn't the Fed's job.
Dennis Kneale, Managing Editor: The Fed did a great thing. The Fed isn't worried about the stock market. The Fed is saying that banks are panicking because they don't have enough cash on hand to cover the loans that they promised. Let's make sure that they have enough cash on hand. That's all the Fed has done here. It was a good move.
Rich Karlgaard, Publisher: I think this was a bad move. The market was already very nicely repricing risk. The Fed makes the economy weaker over time when they do this kind of stuff.
Michele Steele, Forbes.com Sr. Reporter: This move shows that the Fed is not clueless and heartless. It shows that the Fed is listening to the market and giving it what it wants while still paying attention to inflation, they didn't touch the Fed funds rate.
Elizabeth MacDonald, Senior Editor: You don't pump up a bubble again by pumping more liquidity into a system when you have central banks like the ones in Russia, China and India already putting out massive liquidity for political reasons. There is speculative excess that needs to be drained out of the markets. Why reward greedy Wall Street guys who've made tons of money off of these poor home owners who've been sucked into bad loans?
Quentin Hardy, Silicon Valley Bureau Chief: You don't need the Fed being Wall Street's financial love monkey doing whatever it bids. The fact is there is a lot of excess that needs to be worked out over time. A fast crash is no good because then people just think that it is over. And the Fed coming in and saving everybody's bacon just encourages bad behavior.
Shut Down Coal Mines Or Mine More Coal?
Rich Karlgaard: We can't ignore any good form of energy whether it's nuclear energy or coal. On the subject of coal, we have a lot of it, we're the Saudi Arabia of Coal. Also what environmentalists don't realize are the great strides that have been made in sequestering carbon dioxide. Coal is a lot cleaner than it was 20 years ago.
Elizabeth MacDonald: Less people die from nuclear related accidents than from coal mining related accidents. It's time to send old king coal to an early grave and also big oil. It's time to go nuclear. It's cheaper and less expensive to operate.
Dennis Kneale: That would just be impossible. And it's unfair to say that because of the deaths, as terrible as they are, is a time to get out of coal. There are 17 deaths per 100,000 truck drivers in the trucking industry. That's 5 times the rate of coal mining deaths. Are we going remove trucks from the roads and stop trucking products around to Wal-Mart so we can buy stuff?
Michele Steele: We should defiantly get rid of coal. It's highly polluted. It's not very energy efficient and it's dangerous.
Neil Weinberg: Let's face it, we're still getting about 20 percent of our electricity from things like natural gas and oil. And these are things that we have to import from bad neighborhoods. We can't afford to get rid of coal. And no one wants a nuclear power plant in their backyard.
Lea Goldman, Associate Editor: We can't afford to ignore any energy source but that is exactly what we are doing. Why not shift some of the subsidies and tax breaks given to the oil companies towards alternative energy, the green energy.
Best Way to Fix Housing: Let More Immigrants In?
Elizabeth MacDonald: Let the immigrants in. They are hardworking people. They want to give into the system. It would allow the economy to grow without inflationary pressures.
Dennis Kneale: This is a nice thought but in reality the people that come over don't have a lot of cash to buy houses with. This would do nothing to help our struggling housing market.
Lea Goldman: Maybe they won't help now right now, but in a generation maybe. That's how long it takes people coming in with nothing to build of the security to buy a home. In every immigration wave they end up buying homes.
Quentin Hardy: Long-term immigrants are great for the economy. They will buy houses and stay. Short-term it's not going to work. They get paid irregularly, they don't have a history of understanding mortgages. They would be exactly the kind of people who got us into this subprime market in the first place.
Neil Weinberg: 40 percent of new households in this country in recent years have been immigrant families. 20 percent of houses bought are bought by immigrants. We need more of this.
Informer: Bargain Buys
Josh Lipton: Forbes.com Markets Reporter: Alcoa (AA)
Dennis Kneale: Bear Stearns (BSC)
Lea Goldman: Goldman Sachs (GS)
Rich Karlgaard: EMC Corp (EMC)
Our Cashin' In crew this week: Wayne Rogers, Wayne Rogers & Co; Jonathan Hoenig, CapitalistPig Asset Management; Jonas Max Ferris, MaxFunds.com; and Ray Hennessey, FoxBusiness.com Managing Editor
Stock Smarts: Stocks Always Bounce Back: When Is This Comeback Coming?
It was another crazy week for stocks. The Federal Reserve is trying to calm nerves, but the Dow is still way off its all-time high of 14,000. The market has always come back, but how long will it be before we get back to 14K?
Ray: We're going to come back in a matter of weeks, rather than months. The fundamental problem has been the idea that a lot of these big financial companies don't know the value of what they own. The Federal Reserve has been trying to release some credit in order to give them time to value their assets. Once that happens, we'll decide if the sell-off that we've seen has been overdone or underdone. Then, we can start our move upward.
Jonas: I don't think we're going to see Dow 14,000 again for another year or two. That will still be a good return from the lows we saw this past week. Just a few weeks ago I predicted we'd hit 12,500 again. I'm moving more into cash as we get to those lower ranges. There really is a serious problem with credit and the Federal Reserve took action.
Wayne: This is triage. We have some cancer in the system and treating it with a rate cut does help, but fundamentally we'll have to have asset reevaluation. It's already been seen in the derivatives underlying in some hedge funds. We don't really know how far and how deep this is yet. Some banks out there still have not recognized the fact that their assets have deteriorated.
Jonathan: This week we saw a lot of fear come into this market, and I see that as a good thing. There was record volume on every exchange and the market became front-page news. Looking forward, I'm worried about where the leadership will come. It sure isn't going to come from the financials, which are the weakest stocks on the board. A month ago we were kissing 14,000. My fear for us would be falling like Japan's Nikkei Index did in the late 1980s. It was at 40,000 and today it is at 15,000.
Ray: One of the most surprising things from this past week is how technology is playing a leadership role. In the past, when valuations come down in the broader market, technology is usually what brings it down. Now, tech is becoming a safe haven in this kind of market. Given the breadth of technology issues in the stock market and with it in many people's individual portfolios, this will be important while we recover.
Jonas: U.S. stocks are really the best place to be right now. We saw the Japanese market fall 5 percent in a day. Our stocks are relatively stable, even though they are very volatile. I like the large cap growth names. I would avoid the emerging markets and foreign markets, which have been hot the past 3-5 years. Those markets have more problems than ours.
Wayne: I disagree. There are some very good buys in foreign stocks. China is still very much a viable economy, growing at 8-9 percent a year. India also keeps growing. This credit problem is all over the world, not just in the U.S.
Jonathan: Foreign stocks aren't the "out there" idea they were when we talked about them 3-4 years ago. 8 out of every 10 dollars that goes into a mutual fund these days goes into a foreign stock. For my money, I would much rather buy the U.S. multi-nationals that are going to benefit from a weaker dollar. This is a trend that will continue no matter what happens with the credit crisis.
Subprime Me$$: Putting 'American Dream' in Jeopardy?
Some say the stock market is overreacting to the subprime mortgage mess. Are lenders also overreacting, making it too hard for Americans to reach the dream of owning a home?
Ray: Lenders may not be overreacting. It's prudent to step back and not lend money to people who aren't going to pay. This is a good thing; just look at what the problem with subprime is. I don't think it's a problem with lower income or moderate-income people getting more than what they need. It was those in the upper middle class to lower upper class getting bigger houses than they could afford. Any time that is tightened, it's good. One of the problems with the way interest rates have been is that money is almost free. We need to start cutting that off.
Wayne: Bankers are the last people in and the last people out. It happens at every turn. The bankers have overextended their credit. Now, they are going to pull back very quickly, which will hurt the market. The real problem is not with the lenders, but with what lies underneath and that is not just subprime. All of the derivatives out there are what is hurting it. We've seen all these hedge funds go under because of derivatives and what is underlying all of this.
Jonas: This whole mess is making lending harder, but we are returning to standards from this country's past. Homebuyers used to have to put down 20 percent in order to buy a home. It's not unusual to demand that again, but it's just unusual compared to what we have seen the last 5 years. We can't pin all of this on subprime borrowers. Of course there will be problems when the economy slows or when they buy too much house. We almost have to blame the lenders.
Ray: Some of the craziness is about defaults. Defaults don't equate to foreclosure and I think it's important that the market is listening. People are defaulting on their loans, but banks are not taking people's homes away. That's an important distinction getting lost in all of this.
Jonathan: There is a regulatory risk. This hasn't been a subprime credit contagion. This has been a credit contagion across the board. Subprime was just the canary in the coalmine. To Wayne's point, we're seeing the "deleveraging" of the entire U.S. economy, everyone from homeowners to hedge funds. People living beyond their means eventually have to pay. I do think it's a healthy thing as long as we don't get some type of insane regulatory scheme that ultimately makes lending and borrowing harder for everybody.
Good or Bad for Economy to Ban 'All' Toys From China?
Some big name Democrats want to ban all Chinese toys. This in the wake of recent recalls on toys made in China. Would this put our economy in a real fix?
Jonathan: Yes, this would devastate our economy. China does not sell tainted toys. There have been a couple of recent instances, but there is no toy emergency from China. Every businessman knows that it is in his self-interest to sell safe products. Those hurt by this toy recall have legal recourse. Mattel (MAT) has been hit and there will be plenty of lawsuits. Xenophobia is what is really going on; assuming that the American-made product is of higher quality than a Chinese-made product. That's not the case and this protectionist trade policy would put our economy in shambles.
Wayne: I fully agree. When Ford's or Chevrolet's are recalled, they don't ban selling them. That's insane!
Jonas: American products are of a higher quality than Chinese products. They are more expensive, so we don't always go for them. This shows that outsourcing to the lowest cost provider has a dark side. Is the solution banning trade with these countries? I don't necessarily think that's the answer, but consumers do have to own up to some responsibility. If you are going to buy the cheapest thing possible, you aren't going to get the quality or environmental standards of something made in America.
Ray: We have become accustomed to buying cheap. The Mattel situation is a great example of the market working. Mattel never wants to have to write that check again. I'm sure many CEO's are now asking themselves "Who are our suppliers?" "How closely are we looking at them?" and "What are we getting out of them?" The regulation has to come to the companies themselves because the government can't regulate with the huge volume of products coming from overseas.
Jonathan: Companies want to make a safe product. This is just a typical knee-jerk reaction of politicians in election season who will jump on any issue to score some political points.
Wayne: You don't ban American-made products when they are recalled. The free market worked here. Mattel's going to address the problem. It has a great reputation and it will stay that way.
Best Bets: Be$t American Buy$!
Wayne: Procter & Gamble (PG) (Friday's Close: $65.35)
Jonas: Johnson & Johnson (JNJ) (Friday's Close: $62.02)
Jonathan: Berkshire Hathaway (BRK.B) (Friday's Close: $3,948)