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This past week’s Bulls & Bears: Gary B. Smith, Exemplar Capital managing partner; Pat Dorsey, Morningstar.com director of stock research; Eric Bolling, FOX Business Network; Tobin Smith, ChangeWave Research editor; Patricia Powell, Powell Financial Group, and Wayne Allyn Root, 2008 Libertarian VP candidate.
President-Elect Obama's "Jolt" for Economy; Will it Boost or Bankrupt Us?
Wayne Allyn Root, 2008 Libertarian VP candidate: Obama's economic "jolt" will bankrupt the country. The government never has the answer. When an entrepreneur like me creates a job, it costs taxpayers nothing. But when the government creates a job, through stimulus checks or starting new infrastructure projects for example, it costs taxpayers money. We're going to spend trillions of dollars for this bailout and stimulus plan and bankrupt the country. F.D.R. did a similar thing and it prolonged the great depression.
Tobin Smith, Changewave Research: We can afford the economic jolt Obama has planned. We have about $70 trillion of wealth in the U.S, even after this economic downturn. Overall, we're talking about spending a small percentage of our GDP.
Eric Bolling, FOX Business Network: We're wasting a monumental amount of money. But we're not going to bankrupt America. We'll always print more money. People continue to buy our debt. Look at what happens when we pass a stimulus package. Consumers save 80 percent of it, and spend 20 percent. Given what’s happening, people will pay down their debt instead of spending the money.
Pat Dorsey, Morningstar.com: The government just giving money to individual taxpayers sadly will not work. It sounds nice. Yes, the idea plays well but ultimately it's stupid. We tried six months ago. The money goes into savings and really does nothing to stimulate the economy. Where the money should be spent is to rebuild our aging infrastructure or to modernize our electricity grid. If we want to try to develop all these alternative energy sources, such as getting wind or solar power from areas where there are no people, you have to significantly invest in the electricity grid. Spending money in these areas will benefit us for decades to come. Once in a hundred year economic cyclones like the one we're experiencing require this kind of spending.
Gary B. Smith, Exemplar Capital: Obama's economic plan echoes of F.D.R. It's a belief that the government can take your money and spend it better, more effectively and more efficiently than you can. That's what FDR's public works program was. He took money from the private sector and decided that government knew how to spend it best. But history shows that this just doesn’t work.
Obama's "Money Dream Team"; Will Big Names Mean Big Clashes?
Wayne Allyn Root: There are too many chiefs and not enough Indians on this Obama economic team. If they disagree with one another, who's going to make the final decision? I don't understand picking a bunch of Wall Street veterans since they’ve done nothing other than move money around. They don't know how to create jobs or run a business.
Tobin Smith: Paul Volcker is the only guy who has stood in the face of the fire. The others like Tim Geithner and Larry Summers don't have the right experience for serving on this team.
Eric Bolling: I like this team. A lot of smart, experienced guys. It's Hank Paulson who has been a deer in the headlights.
Pat Dorsey: Christina Romer is a solid pick for the team. She knows more about the great depression than Ben Bernanke, and she'll be head of the Council of Economic Advisors. I think she'll be a strong voice on the team.
Gary B. Smith: Getting a bunch of brainiacs together to plan the economy doesn't work. We saw that with the Soviet Union back in the days of the Kremlin. They've spent their lives in government or academia trying to figure out how best to plan the economy, and that's going to be their whole purpose in office.
Will Holiday Shoppers Save Our Economy?
Patricia Powell, Powell Financial Group: The rumors of the demise of Christmas sales have been greatly exaggerated. There are a few reasons we're going to have relatively good sales compared to expectations. Gasoline prices are half of what they were. For people who were worried about the amount of credit they could get, this $800 billion bailout for consumer credit will ease things up. And there are all sorts of sales at stores everywhere.
Gary B. Smith: This will be the worst holiday shopping season probably in the last 40 years. People are looking at their 401(k)s, their stocks, and they are seeing them down from 30 percent-50 percent. People generally feel they can't afford to spend anything. But I'm not sure there's been a permanent psychological change here, more for just this holiday season.
Eric Bolling: Unemployment is up, people are nervous about their job security, their 401(k)s are halved. They'll wait for the sales. As we get further into the holiday season, prices will keep dropping.
Tobin Smith: The amount of credit people can get has dropped tremendously. There just isn't the physical cash out there. This is going to be the worst holiday sales we've seen in decades.
Tobin's prediction: Big 3 Auto Gets Bailout! Ford (F) Up 50 percent By Convertible Season
Gary B's prediction: Bid For eBay (EBAY)! Up 33 percent In One Month
Pat's prediction: Americans can't kick the plastic! MasterCard (MA) up 50 percent in 2 years
Patricia's prediction: Bulk Up On Costco (COST) For The Holidays! Up 40 percent By End Of '09
Eric's prediction: Give Some Holiday Black Gold! "USO" Up 30 percent By Dec. '09
This past week's guests: Adam Lashinsky, Fortune Magazine; Gary Kaltbaum, Kaltbaum & Associates; Dagen McDowell, FOX Business Network, and Matt McCall, Penn Financial Group.
Should President-Elect Obama Take All Tax Hikes Off the Table Indefinitely?
Matt McCall: Yes! All tax hikes should be off the table. The worst possible scenario is raising taxes during a recession and bear market.
Gary Kaltbaum: No to any new tax hikes... and if I were President-elect Obama, I would definitely take capital gains tax hike also off the table; anything to make people feel a little bit wealthier will do right now.
Adam Lashinsky: President-elect Obama had perfectly acceptable policy goals in wanting to eliminate the cuts. It's prudent to wait. It's also sensible to fulfill the goal when the timing is better, i.e., when there's no financial panic.
Dagen McDowell: No… don't push them off indefinitely. Indefinite means "who knows when they will go up?" We know the top rate will go up eventually. Uncertainty is terrible for confidence and makes any kind of planning impossible. Stick to the way things are shaping up; let the higher-end tax cuts expire at the end of 2010.
Will Unions Turn Wal-Mart Into the Next GM?
Matt McCall: Yes. Suddenly health care costs skyrocket along with other expenses for Wal-Mart and that will be passed along to the consumer that relies on low prices from Wal-Mart.
Adam Lashinsky: No. Organizing Wal-Mart would not ipso facto cause management to sign destructive pay packages with employees, the way GM did with its unions. I don't foresee unions succeeding in organizing Wal-Mart. But if they were to, I wouldn't predict the demise of Wal-Mart.
Gary Kaltbaum: The worst thing you can do is change Wal-mart...why mess-up a great thing? Wal-mart continues to be the greatest job creating machine in history and because of how great this company is, they themselves knocked down the level of inflation because of their ability to control costs and pass the savings onto the consumer. Just leave the greats alone.
Dagen McDowell: Unions could hurt what we love about Wal-Mart: lower prices. But higher employee costs, which would surely come with unionization, won't push Wal-Mart over the edge — a la GM.
Best Thing for the Economy: Be a Scrooge?
Adam Lashinsky: Yes! In the longer run the economy, the culture and our country will be in better shape over all if people live within their means, buy things they can afford, have a personal safety net and don't need to rely on government bailouts to save their goose. The economy will be more structurally sound in such a scenario, even if it means some short-term pain.
Matt McCall: No. Get out and shop and support our economy. Do not let the "media" scare you into a hole for the holidays.
Dagen McDowell: The media's not scaring people into staying at home and not shopping. People are legitimately concerned about what's ahead in terms of jobs, housing and the markets. The media didn't make the stock market fall 40 percent in the last year. That's one thing that's freaked out people.
Why should you encourage anyone to go out and spend (possibly on a credit card) if one central problem in this country is the amount of debt people have?
Gary Kaltbaum: Spend if you can but think Dave Ramsey: if you don't have the money...don't listen to any of us! Do what is best for you...but I must say we are having a cultural shift to more savings no matter what.
More for Your Money: Strong Stocks
Gary Kaltbaum: Family Dollar Stores (FDO)
Adam Lashinsky: URS Corp (URS)
Matt McCall: Exxon Mobil (XOM)
On Saturday, Nov 29, 2008, David Asman was joined by Steve Forbes, Neil Weinberg, Jack Gage, Quentin Hardy, Victoria Barret, John Rutledge, Evelyn Rusli, Lacey Rose, and Elizabeth MacDonald.
David Asman: This week, President-elect Barack Obama saying he wants to jolt our economy with a massive new stimulus plan. But, if our Elizabeth MacDonald were president-elect, she'd jolt the economy with a massive tax cut. So, whose plan would work best?
Elizabeth MacDonald: Cut taxes now! Stimulus spending just busts the deficit. Tax cuts bring in tax revenues. When you talk to the experts at the IMF, the World Bank, the accounting firms, we have 101 countries, including all the countries in Latin America, the former Soviet Union satellite states, Russia, China, India, and Peru. They have lower effective rates than we do. Charlie Rangel is talking about possibly cutting the corporate tax rate. Obama's team may be forestalling and delaying the tax hikes he was talking about. Ben Bernanke saying do not raise taxes during a recession. This may be the way to go.
David Asman: So Quentin, tax cuts or more spending: Which is it?
Quentin Hardy: I think one of the things I'm most thankful for this week is in Washington, people are putting aside ideologies and looking at what works. What's increasingly evident is that the so-called Bush Boom based on tax cuts was just borrowing against the future on a credit basis. Now, the future is here and there's nothing in it. Russia, which Liz says has a big tax cut, they are off 70 – 80 percent. They are really on their knees. That stuff doesn't work! People are scared. You cut their taxes, they will just hoard the money. We have seen that. They will not spend or grow businesses. It's up to the government to stimulate.
David Asman: Steve, let me guess – tax cuts?
Steve Forbes: There is confusion here between monetary policy, which the Bush Administration really botched in a way we haven't seen since Jimmy Carter, and fiscal policy, which gets the taxes. Taxes are about incentive. When you increase incentives for people to take risks, it works. If people want to focus on the middle class, take the 25 percent rate and cut it to 15 percent. Cut the corporate tax rate to 20 percent; doing so will start to get the juices flowing! You do both – stable monetary policy, cut tax rates and boom! We move ahead.
David Asman: Spending or tax rate cuts?
Neil Weinberg: I think we need spending! I agree with you, Steve, that over the long term there is no question that tax cuts are the way to get the economy to grow. The economy is like a patient having cardiac arrest. We need to shock it! The way to shock it is to get money into the system. The problem with tax cuts right now is that people aren't going to spend the money. They will put it under their mattresses. This is what we saw the banks do when the government gave the money with no strings attached... they basically hoarded it.
David Asman: John, we had tax rate cuts that went in effect in 1983… it had an immediate effect, didn't it?
John Rutledge: Up 26 percent in the stock market that year. This notion that the tax cuts somehow created this crisis is baloney. The tax cuts are already on the books – due to expire. Everybody knows that. Nobody is talking about a tax cut. What people are talking about and what was leaked over the weekend, was not raising the taxes this next year as Obama had said during his campaign... I'm very, very positively impressed that Obama and his guys intentionally leaked over the weekend that we may delay the tax cut expiration until 2011. The stock market went up a thousand points on the news! I think that's the way. This week, the big tax event was the UK jacking up taxes. They cheered in Singapore because capital will now go from London to Singapore.
David Asman: We didn't hear the cheer way over here on this side of the pond… Victoria, what's going to provide the jolt? More spending or tax rate cuts?
Victoria Barret: The problem is a credit crisis. Tax cuts don't solve that! It's like trying to get rid of your flu with a really big BandAid. Tax cuts are nice. We all like tax cuts. But, right now we're facing a massive deficit. We've committed more capital to fixing this problem than what we spent on WWII. This is just not the time to lower taxes. It probably won't fix the problem. I agree with Quentin – when we saw these rebate checks come out earlier this year – it didn't really change our situation. We're worse than we were then.
David Asman: Could rate cuts actually affect the credit crunch?
Steve Forbes: I think it would certainly help. Don't confuse tax cuts and tax rates with spending money. There is a difference. One changes incentives. The other is just a one- shot. So yes, we do have to deal with the credit crisis. The Fed finally did something right this week in the mortgage market. But that's separate from fiscal policy. Don't confuse the two.
Forbes on FOX Debate
(BEGIN VIDEO CLIP)
Barack Obama: "… focus on the 2.5 million jobs that I intend to create during the first part of my administration…"
(END VIDEO CLIP)
David Asman: This week – Barack Obama promising to create jobs for America… the same week some economists predicting unemployment will top 8 percent next year. But, Steve Forbes says the government getting in on the job-creation business will only make matters worse.
Steve Forbes: Governments don't create jobs. What they create is red tape. The most positive thing governments can do is create an environment where the private sector creates jobs. As we said, if the Soviet Union could have created jobs, it would have won the Cold War. Governments don't do it. They provide the environment for tax cuts, a stable dollar, and the like. So every dollar that the government takes out of the economy to create a job, probably ends up destroying two jobs in the private sector. If they want to do infrastructure, they should do it because it's good for the economy, not because it creates jobs.
Lacey Rose: Government can be in the business of creating productive and important jobs, particularly at a time when we are shedding hundreds of thousands of jobs a month. It absolutely should be! Let's be clear here, this isn't about the government directly employing 2.5 million workers. This isn't about workers punching a time clock with Uncle Sam. It's about funneling government money into important, necessary, and to date – underfunded public infrastructure improvement that will fuel the economy and create jobs.
David Asman: So Jack Gage – does the government create jobs?
Jack Gage: No. Governments create bureaucrats. Free markets create jobs. Government money isn't government money. It's taxpayer money. I don't want the government telling me where my tax dollars will go…. especially when they are mismanaging it already. Look, if you want to stimulate job growth, let small, family-run businesses keep more of what they earn. Expand jobs that way, allow foreign consumers unfettered access to US goods. Let Detroit make profitable cars. Let's get out of the business of creating jobs.
David Asman: Quentin, government creating jobs? Where do you stand?
Quentin Hardy: We talked about this last week, too. Which government job is it you guys don't like? The cops? The firemen? The ambulance driver? The guy who drives the early bus? The teacher? You compare these guys to the Wall Street bankers who took extreme privilege in our society and brought us to the brink of ruin. These government guys look great to me! There is an honor of work in many, many government jobs. The guys who build highways, sink sewer lines… these are valuable services, Jack. I wouldn't take those jobs lightly at all.
David Asman: Now, Citibank workers are government workers.
Elizabeth MacDonald: That's a good point. What we're talking about is the infrastructure plan that Obama may try to enact next year. Let me just give you some facts from history - The 1983 Public Works Act, the worst recession since WW II… the money came in nearly two years later. The recession was over, employment was dropping. The money went toward job training and welfare programs. Only 35,000 jobs were created when 8 million people were employed. A third of those jobs went to the unemployed. It really didn't work. It's somewhat of a good idea.
Neil Weinberg: The government should create jobs and they should do it by getting out of the way. They should cut taxes, reduce regulation, and so on. They could also increase it by getting rid of some of the bureaucrats who apparently Quentin likes in Washington. Why not get rid of the department of education, which has almost doubled under Bush? Why not get rid of Housing and Urban Development? If Obama wants to increase jobs, that's the way to do it.
David Asman: Even president-elect Obama said that. He said he wanted to get rid of some of the useless bureaucratic jobs inside the beltway… he has a long way to go.
Quentin Hardy: He has a lot less ideology going on than a lot of us on this show seems to. He was interested in seeing what works. Right now, the private sector is not hiring; it's saving its seed corn. The government can create jobs and create a good basis for growth in the private sector.
Steve Forbes: The government has certain functions like police, fire, sewer lines and the like.
David Asman: That's mostly local jobs, though… local government.
Steve Forbes: Right and that's not going to employ 100 million people! What employs the other 120 million people is the private sector. There you create an environment, stabilize the dollar, get mortgage rates down, get the tax rates down….
Forbes on FOX Debate
David Asman: Fix housing first! The National Association of Homebuilders just launching a nationwide ad. It says "Grow America's Economy – Start with Housing." The housing meltdown is widely blamed for our financial crisis – but Dr John says fixing housing first will only make it worse.
John Rutledge: Oh I'm sorry! I was just writing my Santa list… Dear Santa, I would like a sled, a bike, an erector set, and $20 million from the federal government.
David Asman: Everyone else is doing it! Why not you?
John Rutledge: They are all standing in line. Who wants the next dollar? That's not going to solve the problem. Housing prices actually need to fall, not rise. They need to fall to where there is a market, at people's incomes and at the mortgage interest rates people can afford. The sooner we get that over, the better. It's really only months away now. This problem will solve itself.
David Asman: Victoria, if we just give money to the home builder, we ‘re going in the wrong direction?
Victoria Barret: There are two issues here. There is what the home builders are proposing which is a series of gimmicks to make housing a more favorable asset class than stocks. I'm not in favor of that because I think that's what got us into this mess. Then, there is the issue of a lot of first-time homebuyers who are well-qualified. They can afford their mortgage, but they aren't able to get the mortgage because the banks are holding back cash. I think what we saw the Fed do this week was a step in the right direction to loosening some of that cash.
David Asman: Steve, I don't think you're totally opposed to that idea, are you?
Steve Forbes: No, it should have been done months ago! Use Fannie and Freddie, the government, to guarantee to get the low rates so they can start issuing and buying 4.5 percent mortgages. That's the way you start to get housing going again. Prices start to go up, monthly payments start to go down, good homeowners are going to get a huge break. And as values start to go up, that's going to help people who are on the borderline.
David Asman: Quentin, what do you say?
Quentin Hardy: I think Mr Rutledge has spent the week studying our Founding Fathers and he is in the spirit of burn them at the stake. It's a turkey week, John. This is a turkey opinion. I'm thankful if housing prices settle out gradually. If they crash fast, all those toxic securities are just going to accelerate. The banks will be back at you. I appreciate how the home builders are just looking for a big government check, but I think anyone who get a government check should agree to a pay cut and no bonus.
Evelyn Rusli: The bottom line here is I don't blame the homebuilders for jumping on the bread line, but at the same time, what we have to learn from the financial crisis is that there is a real danger in artificial prosperity. This plan by the homebuilders will essentially dupe homeowners into thinking they can afford these jumbo mortgages that they really can't.
Informer: Bargain Buys!
David Asman: Forget all the bargains in the malls. Our informers say the best deals are on Wall Street this holiday shopping season!
Jack Gage: Google (GOOG)
Evelyn Rusli: Dow Chemical (DOW)
Victoria Barret: Costco (COST)
John Rutledge: Verizon (VZ)
President-Elect Obama's Tax Cut For 95 Percent of Americans; Can We Afford It?
John Bradshaw Layfield, Layfield Energy: No, we can't because those people don't pay most of the tax anyway. 5 percent Don't pay the tax. If you don't lower the corporate tax rate where people can hire more employees in this type of environment, you are doing a disservice to this economy. By lowering taxes on 95 percent, raising on the 5 percent who are business owners, it kills this economy.
Damon Vickers, Nine Points Capital Partners: It does. Everything that the government has been about doing is about reliquifying the consumer. I agree with what the other guest just said, but really the consumer generates the sales and earnings that gets the economy going.
Jonathan Hoenig, CapitalistPig Asset Management: It's not consumers that we want. It's producers. We want people who create wealth. And that's what that top 5 percent is. I know they are an easy target. You paint them to be the big, bad 5 percent. These are the people who make the investment, who create the jobs. They are the atlases that power the country forward. I think you hurt them, you target them, you really hurt the whole economy.
Wayne Rogers, Rogers & Co: The question, when you say can we afford it? There is only one place to get the tax dollars if you're going to do as both Jonathan and JBL said. 65 percent of the taxes are paid by the top 10 percent of the people of the United States. If you're going to tax them, that's where you have to get it. His other biggest problem that I see is he is talking about cutting the deficit. There is no conceivable way when you have got another 2/3 of that is in entitlements. He doesn't want to cut entitlements. He wants to expand entitlements. I think the guy is painting himself into a very difficult corner. I don't care how many economic advisors he has. He is not going to be able to get it out unless he does something fundamentally different.
Tracy Byrnes, FOX Business Network: My poor kids will have the inheriting debt out of this. He can't tax the wealthy because the wealthy create the jobs now. Any economic advisor I talk to says, again, he is crazy if he thinks he is going to get this through, that he is going to be able to raise taxes on the rich, cut on the lower income. You don't do this when the economy is ailing.
Jonas Max Ferris, MaxFunds.com: I don't remember so much negativity about the Bush tax cuts and the deficits they caused. This tax cut Obama is proposing is unaffordable as the Bush tax cuts because when they cut taxes in these recessions, which is great, they never do the opposite, when the economy is booming get it back so we can balance the budget. That's the problem with this plan and the bush tax cuts. The only way this would have been affordable is to raise taxes on the higher income people to pay for it which he doesn't want to seem to want to do anymore, Obama.
Lawmakers Acting Like CEOs: End of Free Markets?
Tracy Byrnes: It's just the beginning. Soon enough they will be picking out the lunch menu and the colors for the bathroom. D.C. is going to be so entrenched in corporate America that CEO's are going to have no control. When you're getting money from someone, you have no choice but to listen to them. That's where we are right now.
Jonas Max Ferris: Who brought this on themselves? These banks fade. The government saved them from failure. There are going to be some strings. I don't like the complexity of how they are financing these banks. I say take stock in them, own a piece and call it a night like a normal shareholder. The bottom line is you own this business. You have to say whether they have corporate jets or not. You don't like it, don't take money from the government.
John Bradshaw Layfield: A congressman telling somebody to save money? That's like a Frenchman telling somebody to be brave. What the Mets need here is a bullpen, first of all. I'm a Mets' season ticket holder. Citigroup was losing $400 million on this endorsement. They just fired 52,000 people with families. They are spending this money to name a stadium? Something is wrong here.
Jonathan Hoenig: Before I became an involuntary owner in Citigroup, who cared, right? When it's actually a private company not owned by the taxpayers, let them do whatever they want. But all of a sudden against my will and against the American people's will, we're owners of Citigroup and Bank of America and probably the big three and all these other automakers.
Wayne Rogers: It's nuts. What is this? This happens to be a golf club. General motors is sponsoring two of these tournaments on the tour with my money and your money. That's wrong. Because we are bailing them out. The executives, it's their fault, they got us into this. They should be punished. The Congress is not capable of running those companies. Once the executives make such a dumb mistake, why should I be paying for this? Tell me why I should be paying for that?
S&P Down Nearly 25 percent in 10 Years; Is Long-Term Investing Bad Idea?
Jonathan Hoenig: Well, somewhere along the way buy and hold became buy and hope. The truth is the market was actually doing pretty well up until the point the government got involved in essentially intervening in the financial markets. There has been a lot of damage done in just the last couple of months. I don't think buy and hold is dead. I do think a lot of those former growth stocks like motor old — like Motorola, a lot of names from the earlier era is never coming back.
Damon Vickers: Is it a good way to approach the market to be in denial of what's going on? Probably not. Buy and hold works in the context of an expansive economy with rising sales and earnings growth. The enthusiasm for risk and higher sales and earnings growth. I'm talking about a bull market. It doesn't washing in a bear market. The idea of now loading up on yesterday's heroes, accumulating the Motorolas, Dells, Microsofts, means you will have a portfolio loaded down with old horses that are tired because they ran the last race. When the bull market returns — inevitably the bull market will return — it's very important that at that time we have capital to invest with and invest in companies that are benefiting from social change.
Tracy Byrnes: Buy and hold works only in a bull market: to say that, we go back to the monkey shooting at the board to buy stocks. People aren't chasing returns. If you're chasing returns by saying buy in a bull market, you missed the boat. You're looking at if I bought 10 years ago and today. What if I bought seven years ago, five years ago? The numbers are entirely different. What's dead is this notion that you can only revisit your portfolio two times a year. You need to stay on top of it. You need to be involved in it, quite frankly. You can't just buy a bunch of mutual funds and close the book.
Jonas Max Ferris: There is a lot of bad logic at the top of the market and the bottom. Now we're seeing the bad logic at the bottom. 10 Years ago, the S&P 500 was wildly overvalued because everyone said be in bonds for over 10 years. Now those 10 years are up. It's just as wrong now as it was then. The market is 75 percent cheaper. You will do well over the next 10 years.
Wayne Rogers: When you say buy and hold, you have to define your term. What is a long term? One year, three years, 10 years, nothing is forever except diamonds and herpes. I don't know that any stock is forever. So that it's impossible to say when you're going to say buy and hold, is it going to be for a year, three years, five years, you can't hold everything. You have to time certain things.
Best Bets: Short and Long Term Investments
JBL: Kansas City Southern (KSU)
Jonas: Vanguard Total Stock Market ETF (VTI)
Wayne: UltraShort Lehman 20+ Trsy ProShares (TBT)
Jonathan: FUJIFILM Holdings Corporation (FUJI)