DISCLAIMER: THE FOLLOWING "Cost of Freedom Recap" CONTAINS STRONG OPINIONS WHICH ARE NOT A REFLECTION OF THE OPINIONS OF FOX NEWS AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE WHEN MAKING PERSONAL INVESTMENT DECISIONS. IT IS FOX NEWS' POLICY THAT CONTRIBUTORS DISCLOSE POSITIONS THEY HOLD IN STOCKS THEY DISCUSS, THOUGH POSITIONS MAY CHANGE. READERS OF "Cost of Freedom Recap" MUST TAKE RESPONSIBILITY FOR THEIR OWN INVESTMENT DECISIONS.
Bulls & Bears
This week’s "Bulls & Bears:" Gary B. Smith, columnist for RealMoney.com; Pat Dorsey, director of stock research at Morningstar.com; Tobin Smith, editor ChangeWave Investing; and Scott Bleier, president of HybridInvestors.com; Bob Froehlich, chairman of investor strategy at Scudder Investments; Adam Lashinsky, senior writer at Fortune Magazine; Stuart Varney, FOX Business News contributor.
Trading Pit: Will August Terrorize Stocks?
Will the stock market be terrorized in August?
Terror fears close to a boiling point. Plus August may be the hottest month of the year temperature-wise, but it's usually ice cold for Wall Street. In fact, this month has been the worst month for the S&P 500 over the past 15 years. Though right now, the S&P is right at 4-year highs
Bob Froehlich: August is so H-O-T for stocks and will remain that way because:
H -- Housing will continue to drive the economy and markets higher.
O -- Oil at $60/barrel is old news. It will not change behavior nor will it slow the economy.
T -- Two/thirds of the economy is driven by the consumer. On a year over year basis, disposable income is up 5.5 percent.
The economy and market are both heading higher!
Adam Lashinsky: August is a boring month for the stocks and the market goes down for a reason—partly because all of the professional investors are on vacation. This August won't be different than any other. If anything, it will be worse because the market’s relatively expensive right now. The market’s gone down in both good and bad years. Don’t fight that.
Tobin Smith: Employment drives the economy. We have demand because there are more jobs and we have more jobs because there’s lots of demand. Nothing has stopped the market from going up so far this year. The high price of oil, interest rates, and a lot of other things that could have brought it down, haven’t. The terrorists aren’t going to stop this economy.
Stuart Varney: Last month when the suicide bombing hit London and threatened the U.S., the market went up. The stock market just had its best July in the last nine or ten years. I’m not concerned about Wall Street being terrorized. Unless the terrorists come up with something worse than 9/11 that derails this economy, this stock market will shrug it off. This economy is too strong right now. Tobin is right. We’ve got a rip roaring economy and very strong corporate profits. This is what the market looks at and what drives it up.
Pat Dorsey: You’ll probably get a chance to buy stocks a lot lower in August. I think the market is about 10 percent overvalued right now. Adam makes a great point that volume tends to be low average right now because everyone’s on vacation. This means that the market is very vulnerable to any type of news. If there’s a bad piece of news, it’s much easier for stocks go down due to the little volume.
Gary B. Smith: Taking a look at a chart of the S&P 500, it certainly backs up the arguments that Toby and Bob make. We’ve been moving sideways for a long time, but now the S&P has just started a new leg up. It broke to new highs and this bodes very well. Look for a good August and a good fourth quarter of the year.
Scott Bleier: I’m buying selectively. The market is incredibly speculative right now. Small-cap and Internet stocks are leading. Bank stocks and big-cap stocks are going nowhere or lower. This means that the market has built-in perfection and it will go lower.
Gary B, Tobin, and Bob each picked their hottest stocks for August.
Tobin: I like Fording Canadian Coal Trust (FDG), which invests in metallurgical coal, which is a type of coal used to make steel. Coal prices have doubled, which will make this stock do well. Their dividend is also going to increase greatly. I own and recommend Fording. (Fording Canadian Coal Trust closed on Friday at $101.76.)
Adam: This stock is vulnerable to falling oil prices. If oil goes down, like I think it will, coal is going to be a lot less valuable.
Gary B: My pick is Georgia-Pacific (GP). It’s the world’s largest producer of tissue products making brands like Brawny paper towels and Quilted Northern bath tissue. The stock was a real dog until a couple weeks ago when its momentum changed. The chart shows that the stock is now consolidating after a breakout and is ready to run back to its 2004 high near $38 within the next month. (Georgia-Pacific closed on Friday at $34.15.)
Pat: This is a cheap stock and a pretty good company, but it’s in a tough industry. The problem is that a big portion of the company’s revenue comes from building products like wood panels. Pricing on the building materials has been high, but is going to come down. I’d wait for a few months because the stock will probably be cheaper.
Bob: I’m seeing green with Deere & Company (DE). The farm equipment company’s revenues are up 15 percent. Plus, it pays twice the dividend that others in its industry pay. This is a great value play with a great dividend. I own it. (Deere & Company closed on Friday at $73.53.)
Scott: This is a value stock and a value trap. The best time to buy a stock like this is at the beginning of the business cycle when earnings aren’t so great, not now when things are doing well. Deere is fully valued. Plus, the farm bill just passed cut subsidies for tractors.
You probably spend enough money on back-to-school shopping, but how can you make money from it?
First up, Target (TGT), the second largest discount chain in the U.S. behind Wal-Mart. It sells everything from pens and paper to clothes and iPods. (Target closed on Friday at $58.75.)
Gary B: Bull. This is a well-run company and it’s at an all time high. Cannot hate the stock right now.
Adam: Bear. That’s why I hate it. (Gary B. likes it.) Wal-Mart (WMT) is going to be resurgent. Own it instead.
Tobin: Bull. Buy it.
Scott: Bull. I like Target. It straddles the line between expensive and lower priced merchandise. It’s perfectly positioned.
Pat: Bear. Nice niche, but the stock’s too expensive right now. I agree with Adam. Buy Wal-Mart instead.
Bob: Bull. This is an oxymoron stock: high-end discount retailer.
Next, Borders (BGP), which is the nation’s second largest bookstore. Students need their books and coffee! (Borders closed on Friday at $24.81.)
Bob: Bear. Just because you put leather chairs in the store and sell coffee doesn’t mean you’ll buy books there. Amazon.com (AMZN) is really the place people got to buy books.
Tobin: Bear. Lousy business model. Overpriced. Too much competition.
Scott: Bull. Borders has upside considering that Barnes & Noble (BKS) stock is higher and more expensive.
Pat: Bear. Not a great company. Not a great stock.
Gary B: Bear. Does have some upside, but it crashed in April and hasn’t recovered. Wait to buy until it shows some strength.
Adam: Bull. Two words: Harry Potter. Kids are buying these books and they’ll be buying more. It’ll be good for booksellers.
Now onto Dell (DELL), which is one of the top computer makers in the U.S. This stock has gone almost straight up in the last three months. (Dell closed on Friday at $40.47.)
Scott: Bull. It’s a money machine and the leader in its industry. It’s trashed everyone in the business.
Pat: Bull. I love this company. It’s the strongest of all the stocks we’re talking about. A little pricey right now, but a buy once it hits $30.
Tobin: Bull. Wait for a 10 percent pullback, then buy. It’s going to be a big hit at Christmas with new televisions coming out.
Adam: Bull. I agree. Good in the fall for back to school, but also good at Christmas.
Bob: Bull. Lower inventory + Lower costs = Higher profits.
Gary B: Bear. Dell will get a pullback and wait to buy until this happens.
Lastly, Sears Holdings (SHLD). This is the company that was formed after Kmart bought Sears. It’s the third largest retailer in the U.S. The stock has doubled in a year. (Sears Holdings closed on Friday at $154.60.)
Pat: Bear. The story is done. It’s too expensive for something that isn’t growing.
Bob: Bear. When one mediocre firm merges with another mediocre firm, you just have one big mediocre firm.
Gary B: Bull. It’s not broken. I’ll keep trending up. Stay long on the stock.
Adam: Bear. This is a blue light special that has been on sale for too long. Plus, it’s at a high price.
Scott: Bear. Way overpriced.
Tobin's prediction: Stocks stay hot! S&P 500 up 10 percent by December
Bob's prediction: China + Energy = Big Bucks! Buy Petrochina (PTR )
Gary B's prediction: Stay tuned to Comcast (CMCSA); stock doubles in 2 years
Scott's prediction: DaimlerChrysler (DCX) revs up 20 percent in 1 year
Pat's prediction: Avon (AVP) is beautiful; gains 20 percent in next year
Cavuto on Business
Neil Cavuto was joined by Ben Stein, author of "Yes, You Can Be A Successful Income Investor"; Gregg Hymowitz, founder of Entrust Capital; Meredith Whitney, executive director at CIBC World Markets; John Rutledge, president at Rutledge Capital; Geoffrey Colvin, senior editor at large at Fortune Magazine; Tom Adkins, agent at Re/Max Property Center; Ray Lucia, host of the "The Ray Lucia Show."
The Bottom Line
Neil Cavuto: Another month, another new high for the housing market: the median price for an existing home jumped to a record $219,000 in June. But, John Rutledge you're still worried. Why?
John Rutledge: The economy is great but the housing market sucks. The real estate boom is over Neil. The duration of the housing stock is about 26 years. Rates are up and the China deal is putting up rates even more. China owns $700 billion of U.S. securities that are all “fudge-able” with treasury bills and mortgages. Long-term rates are up already about a third of a percent in the last week.
Tom Adkins: John, I love ya but you’re wrong. There are two things that make prices go up: net income growth and cost of borrowing. Net income growth is skyrocketing right now. In the old days Fannie Mae did all the mortgages through the bond market. Well now Wall Street is taking that over and they’ve found out something very interesting: interest rates have been exaggeratingly high because Alan Greenspan kept jacking up interest rates.
Ben Stein: I have a simple rule, and that is if a thing cannot go on forever it will stop. Housing bubbles do not go on forever. Rates at 14 percent a year cannot go on for very long.
Meredith Whitney: I think China is overrated. In fact, in 2004 their holdings were only 12 percent of the whole pie in the U.S. treasuries. I think the Fed is the biggest threat. 60 percent of new mortgages are priced off of the short-term rates. So my point is the housing market will slow a little.
Geoffrey Colvin: We know for sure that interest rates aren’t going down. Property taxes are going up. More than that there’s the simple idea of supply and demand. The U.S. is creating 1.2 million new households a year but 1.7 million new homes a year. We’re building more homes than prospective buyers for them.
Gregg Hymowitz: It’s very much driven by rates. I don’t think they’ll never go back down. Real estate as a macro is very difficult. This is a regional phenomenon. I don’t think people are going to move based on what we say here. It might affect housing stocks more.
John Rutledge: The buy/sell spread for a house is much bigger than for a stock. Think of it as 10 percent of the value, which means you can’t trade housing like you can stocks. If you’re going to sell your house, sell it.
More for Your Money
Neil Cavuto: Smaller stocks making investors large profits. Time to bet small to get more for your money? Big Dow stocks eking out meager gains in the last 12 months, while the small stocks in the Russell Index have dramatically outperformed them. Are small stocks still a good bet, Gregg?
Gregg Hymowitz: Small caps have had a big move. The valuations in general may be a little out of whack. But I think you can still make money in selected small stocks with real growth.
John Rutledge: If they’re zooming they’re zooming for a reason and that’s because they’re getting cheap, available bank loans, and they didn’t until a year ago. They’re screaming in performance. There’s a lot more there. I own them.
Ray Lucia: I think you have to focus a little more on growth and value. I like Strayer Education (STRA). They have no debt and have been around 100 years. They’re super profitable. The other day they went up 21 percent.
Gregg Hymowitz: The stock is not cheap and as you said, you may want to focus on value. And some of the results have been somewhat disappointing. We like leading death care industry provider Service Corp International (SCI). The company is very cheap at twelve times free cash flow. You have an aging population out there that is just ripe for customers.
John Rutledge: That’s a sad stock. It’s the "we kill ‘em. You chill ‘em stock." It’s a great company but it’s too expensive. I like Quest Diagnostics (DGX). As the boomers age, the lab guys are going to crawl into every orifice in your body to take samples. So I’ll kill them, Gregg will chill them. It’s got great management.
Ray Lucia: Doctors' offices are setting up their own labs. Hospitals are expanding their lab operations. And here’s the other thing, you still have to get your money from the government. You have Medicare and Medicaid and anytime the government is involved in reimbursement, there could be a potential problem. I like the stock but it’s a little too risky for me.
Ben Stein: I like the indexes and I like iShares S&P Small Cap 600 Index (IJR). I don’t think I have the where-with-all to pick a “best small cap”, but I think this index will capture all of them. It’s had a fantastic record. Over long periods I think it will do fabulously well.
John Rutledge: I like the Russell 2000 better because it’s trading volume is better, and therefore its spreads are narrower. You can get better execution. But IJR is fine too. I own it too.
John Roberts: Stock Friend or Foe?
Neil Cavuto: Supreme Court nominee John Roberts, if he's confirmed, would his decisions help or hurt stocks?
Ben Stein: I don’t think it’ll have a darn thing to do with stocks. The Supreme Court is already pro-business. He is very pro-business. The court tends to side with the boss and that’s not going to change. There’s a long history in the Supreme Court of them siding with the boss.
Gregg Hymowitz: I agree. If you review his scant record, it clearly seems he’s a strict constructionist, which means he interprets the Constitution very literally. In one of this well known cases, it was whether or not Congress can regulate a business and he said no, they cannot regulate it. So he seems like a big business person. However, he’s not good for workers because he’s sided with companies and not workers.
John Rutledge: The one thing about Roberts is he’s not going to be a customer for Gregg’s coffin company for decades. Roberts is a young guy. Intellectual property and deregulation is going to be helped by his appointment. It’s great for the stock market. I think we’ll see more pro-property rights decisions and more pro-capital spending decisions and less play on social issues.
FOX on the Spots
Ray Lucia: Mortgage crisis ahead; many risk losing their homes!
Gregg Hymowitz: Roberts’ confirmation will be a cakewalk!
Meredith Whitney: Corporate buybacks fuel big market rise!
John Rutledge: Telecom legislation passes; buy Cisco and Qualcomm
Ben Stein: China's currency change won't trim U.S. trade deficit
Neil Cavuto: Get ready for a repeat everyone, a stock repeat. It will be back just like last year... a strong second half rally.
Forbes on FOX
In Focus: Who Wins and Loses With a Flat Tax?
Steve Forbes, editor-in-chief: Everyone wins with a flat tax. I've designed it so that everyone gets a tax cut. What we do is throw out the 9 million word corrupt tax code and replace it with a single rate 17 percent, after exceptions and deductions for adults and children. A family of four would pay no federal income tax on their first $46,000 of income. Only 17 percent above that. No tax on your investments, no death tax. No taxation without respiration.
Dennis Kneale, managing editor: There's some reason that Steve has been preaching this for 10 years and today the best example of a country using a flat tax is Estonia. I think a lot of Americans feel that something is happening here but you're giving a tax cut to the rich. One percent of people make over $200,000 a year and right now they pay 27 percent of that to the government. Under Steve's plan they're only going to pay 17 percent. It's a tax cut for the rich yet again. Is that what we can afford at a time when our country is spending $300 billion more every year than it takes in?
Rich Karlgaard, publisher: We've got a crisis of citizenship participation in this country. The half of the people who don't pay federal income taxes correlates with the half that feels alienated, who's more subject to crime and other pathologies. I think the way you bring them in is to say that there is a price to being a citizen. We're all in this together. That's the way churches and volunteer organizations work. They have much higher degrees of participation. Everybody pays the same rate.
Mike Maiello, staff writer: I don't think this will be good for the economy. There really are losers in this plan. There are middle class workers who lose a lot of deductions that mean a lot to them. They don't actually pay the rates as stated right now. There are deductions for employers to pay healthcare. Without that incentive, why would my employer kick in for my healthcare? I'd have to take that bill on myself. I'd rather pay more in taxes than more to the insurance company. It would be cheaper in the long run to keep it as it is. The other example would be independent workers. You have two guys with the exact same job. They're both plumbers. They both make the same amount of money. One is working for a company, the other is working for himself. He gets no business deductions. Should he pay the same tax? It's not fair.
Quentin Hardy, Silicon Valley bureau chief: This plan might work, but on another planet. Lobbyists live and die by tinkering with the tax code all day. We're not going to be able to kick them out. It's not about ending the IRS. It's about ending the special interest that is tinkering with the tax code. I just don't see how Steve's plan is going to work that way.
Bill Baldwin, editor: Steve is totally right, the code is too complicated. My favorite atrocity is that there are seven different and conflicting provisions on how to get a tax break out of college. You need a PHD to figure it all out. But housing is a bit of a problem. I'm sure that the Democrats and the realtors will gang up on Steve, just like they did a couple of years ago in New Hampshire and say, if this goes through, we'll all be poorer the next day because our houses will be worth less. That's absurd, but they'll win. They can stop a tax cut that way.
Steve Forbes: My book deals with these objections. In terms of mortgages, people will actually earn more money so they will be able to better pay for their houses. Interest rates go down with the flat tax so they can better afford those monthly payments. If you eliminate the capital gains tax, housing is helped and so is charitable giving. In my book, everyone gets a tax cut: middle income earners and low income earners. They all come out ahead. With a low rate of 17 percent we'd have an investment boom and we would make America more competitive against the Indias and Chinas of the world.
Mike Maiello: I think they probably do come out ahead numerically on the tax part of it. But I think there are incentives for people to provide services, like healthcare and retirement contributions that would get lost in an environment where there are no tax incentives through deductions.
Steve Forbes: We live in a world today where companies with defined benefit pension plans are going under and they're throwing that on tax payers. So you're not going to get that anyway. With a 401k, you can put money in tax free and come out ahead.
Quentin Hardy: Do you think that corporate lawyers are going to give up all their sweet perks, benefits and corporate deductions? Do you think that they'll just roll over for this thing?
Steve Forbes: That's why I wrote this book, as a call to action. I have a chapter in the book about how you can get involved and make it happen. If everyone takes the attitude that it will never happen, it won't. But in a free country we can make it happen.
Dennis Kneale: I have a question for my boss. In the first five years after the flat tax passes, what happens to tax revenue? Are you bringing in the same amount of money or do we bring in even less money and the deficit goes up?
Steve Forbes: The first four years the government takes in a little less than projected. The fifth year the revenues start to gush in from the stronger economy. In 10 years we're way ahead. Don't worry about the government, worry about the health of the American people and the American economy.
Rich Karlgaard: This is a great idea. Hong Kong is actually the best example of a flat tax user, with a low rate of around 15 percent. They are one of the fastest growing economies in the last 20 years.
Dennis Kneale: There is something wrong with someone who earns $50,000 a year paying 17 percent and someone who earns $500,000 paying 17 percent.
Steve Forbes: If they make $50,000 they only pay it on $4,000. Read the book Dennis.
Flipside: Dumping Labor Unions Would Help Workers And Economy!
Dennis Kneale: Unions have become a part of the problem. Unions want to specialize in letting their workers get more money for working less. That's the worst thing about unions and I think it's dragging the economy down.
Quentin Hardy: In a way it's a blue-collar white-collar split. This past week, a third group broke away from the AFL-CIO. What's happening is the fast growing service industries want to get away from the old blue-collar industries which are using protectionist measures in Congress to foster their growth. The young fast growing unions want to have more members and grow that way. Those unions are smart and want to help and have a place in this system.
Rich Karlgaard: Let's take a look at the auto industry. In Michigan where the auto plants are unionized the average absentee rate is 20 percent. Five percent of those people don't even give an explanation. Meanwhile down in Kentucky and Alabama, where Toyota and Honda operate, the absentee rate is about half as much and they're not unionized and the employees are happier. I think those facts answer the question.
Quentin Hardy: What the real deal with Ford and the 20 percent is that they used the unions to try and stop the absenteeism and proclaimed it as a union triumph that the union and management worked together to end that absentee problem. There are ways that unions and management can work together.
Elizabeth MacDonald, senior editor: This isn't the first time that we have fighting within the unions. The AFL-CIO kicked out the Teamsters in 1958 for being to corrupt. I don't think we need to treat all unions like radicalized, socialists do-nothings. They also represent nurses, home healthcare workers and computer programmers. The problem is that unions haven't learned to grow with a more mobile economy. So when you get old and stagnate like that you do need to change. I think these unions are being smart to break away from the old regimes.
Steve Forbes: In essence, these are two dinosaurs fighting each other. You need reform. The state should have the right to make laws so that you don't have to join a union to go into the workforce. Workers should have to opt-in for their dues to be used for political purposes instead of them doing it without their permission. Also allow for portable pensions and healthcare plans.
Lea Goldman, staff writer: Keep in mind that without these unions the 12 percent of people, who are actually in unions, would be getting by on the government when it comes to things like health insurance, which is the biggest fringe benefit that people get when they are involved in unions. My question is in a global economy, how can unions appeal to a larger base? The key is attracting overseas employees.
Elizabeth MacDonald: In the 1950s, 35 percent of all workers were involved in unions. The problem is you don't see the transparency of where those political donations are going to. They're going into Democratic coffers. Unions did help build the middle class with better health benefits and wages. But I think better ideas for the unions would make them thrive.
Dennis Kneale: Unions stopped exploitation of the workers many decades ago. Today , employers realize that workers are the best asset they have and that has hurt the need for unions.
The Informer: U.S. Job Making Stocks
Rich Karlgaard: Motorola (MOT) is my pick. This company now has heat like Apple did with the iPod. The CEO is probably the best big company, technology CEO in the business.
Bill Baldwin: Two problems. Cell phones tend to be susceptible to fads, just like teenage apparel, so this thing could come and go. Second thing, I think Motorola is doing a better job of creating jobs in China than in Illinois. I like Panera Bread (PNRA). It's a chain of bakery restaurants that have more than doubled employment in the past 5 years.
Rich Karlgaard: I don't think so. If you believe, like Bill Baldwin does, that the Dow is going to 6,000 in the next 12 months then we'll all be eating bread and water and this would be a good pick.
Lea Goldman: I like Sonic (SONC). It's a chain of fast food drive-in restaurants. They are based primarily in the Midwest and southwest and they're expanding pretty aggressively and they're generating a ton of cash.
Dagen McDowell, host: Sonic does still have to go up against the big guys, like McDonalds and Wendy's. And the stock is pricey.
Lea Goldman: The stock is not at its high. It's on a run but not a tear. It does compete against those guys but it has that drive-in niche.
Elizabeth MacDonald: I like Abbott Labs (ABT). They are very family friendly. They have a great pipeline of drugs for cancer treatment and for HIV. They're also becoming a better diagnostics company. I think as the baby boomers age they are going to be looking to do more tests to pick up any aliments that they have.
Lea Goldman: I'm not in love with Abbott. I think their margins are slipping which tells me that they're generic stuff is doing better than their high margin stuff and I think that that is a ominous sign moving forward.
Makers & Breakers
• Ingersoll-Rand (IR)
Jeff Kleintop, PNC Advisors: MAKER
This company is really in a hot spot right now. Not only is construction spending strong, business spending is looking good and steel prices are coming down. That's the key input for these guys so their margins are improving. A real positive is the highway bill. That's $300 billion going right into high margin road construction equipment made by Ingersoll-Rand.
Dagen McDowell: You've got a target price of $98. (Friday's close: $78.17)
Elizabeth MacDonald: MAKER
I like this stock. For a cheap price to earnings multiple of 14 times earnings, that's really cheap. You get a broadly diversified industrial conglomerate that's been beating earning estimates several times in a row.
Bill Baldwin: MAKER
I love that this company is so diversified, from golf carts to freezers to doorknobs. It's headquartered in Bermuda, which saves the company on corporate taxes.
Dagen McDowell: But this stock really hasn't done anything this year?
Jeff Kleintop: It really hasn't. And there are some of the concerns that they're still that old-line manufacturing business exposed to autos. They're not. They got rid of that business and they've been focusing more on construction.
• Wyeth (WYE)
Jeff Kleintop: MAKER
Wyeth is a pharmaceutical company and I think one of the reasons to buy it is because volume is picking up after a few lackluster years. Before pharmaceuticals weren't very rewarding for investors
Dagen McDowell: You think it can go to $55. (Friday's close: $45.75)
Bill Baldwin: BREAKER
This is a breaker for you. They are going to get sued not just by a handful of people who might have been injured by their diet drug but by whole stadiums full of people who claimed they were injured but weren't.
Elizabeth MacDonald: MAKER
I think they are putting that diet drug problem in their rearview mirror. I think they are gong to benefit from Medicare reforms, plus they've got a great oral contraceptive combination for women in the pipeline.
Stock Smarts: Gas Price Villains?
Feeling the pain at the pump? Maybe the Saudis aren't to blame. Are the real villains actually right here in America and working on Wall Street? Are hedge funds a big reason gas and oil prices are so painfully high? Billions of dollars from wealthy investors are in these high risk/high reward vehicles. And critics say a lot of that money is being used to manipulate oil prices by bidding up its future price.
So what does the crew think?
Jonas Max Ferris, MAXfunds.com: They’re not all bad, but they’re definitely part of the reason. When there’s a lot of money betting on anything, it can drive the price up. That’s one thing when it’s stocks, but when you’re talking about commodities like oil, that the economy needs, and everybody’s betting that it’s going to go higher, you’ll drive the price higher.
Jonathan Hoenig, Capitalistpig Asset Management: Jonas, there are thousands of hedge funds out there. What makes you think that they’re all betting on higher oil prices? You know what? The last time I looked at some traders report, it wasn’t so heavily leveraged long in crude.
Jonas Max Ferris: Well, first of all, it doesn’t have to be all hedge funds betting on it. There’s enough money in some of them and there’s enough leverage. And individual investors are also opening up commodity accounts with huge amounts of volume and betting also on oil prices.
Jonathan Hoenig: So basically, Jonas’ message today folks is, ‘rich people are to blame for high oil prices.’
Jonas Max Ferris: No. My message is, ‘when too much money goes into any investment strategy, it can ruin the economy.’ It did it with tech, when too much money was going into startup businesses.
Terry Keenan: But you know, no one was complaining when hedge funds and other investment vehicles were running the NASDAQ to 5,000. Everyone was perfectly happy with that.
Charles Payne, Wall Street Strategies: Well, there are a lot of people who are complaining now, though. And I’ve got to tell you, Jonathan, it’s more likely that rich people are manipulating it than poor people. But you’ve got to admit that these hedge funds are playing a major role. When oil first took off, it was the ‘terror premium.’ And then it was ‘this’ premium, and ‘that’ premium. If we’re all going to be honest about it, we know that hedge funds are playing a major role in this. Look, you could also add state taxes. You could add the fact that we all want clean air, but we’ve got to pay for it. There are a lot of obstacles other than Saudi Arabia, but hedge funds are right at the top.
Rebecca Gomez, FOX News Correspondent: Well look, I wouldn’t say they are a major problem. Do they exacerbate the problem? Yes, because they have a lot of money at their disposal. But are they primarily responsible for gas prices being so high? No. Look, it’s a fundamental supply and demand. This is the biggest consumption season of the year for the US. You have huge demand from China, and there are all these fears overseas about disruption supplies and fears over hurricanes.
Jonathan Hoenig: Rebecca, you’re a journalist and you let this hedge fund mythology play out. The media gets it wrong. The media wants you to think that there is this cabal of guys with George Soros scheming to move prices. That’s a myth.
Gary Kaltbaum, Kaltbaum & Associates: It is fashionable right now to blame the hedge funds for it being cold out, for it raining out. I don’t remember the hedge funds getting the plaudits for when oil prices were down to $20. Rebecca is right about one thing: it is supply and demand. That’s it. The market is too big for hedge funds. To reach and to say that the hedge funds are getting together and they’re getting in a room and getting on the phone and saying, ‘ooh let’s make oil prices too high,’ I don’t buy it.
Jonathan Hoenig: It’s insanity.
Rebecca Gomez: I didn’t say that there was any collusion; I said that they exacerbate the problem. We’re talking about $1 trillion being played here in this speculative market. It does play a role, but it’s not the primary factor.
Charles Payne: Not only that, Gary, but you act like these hedge funds have a conscience, you know? They do hop on the board. You know that when there is a momentum play and there is a game to be played, they play it to the hilt.
Gary Kaltbaum: But they do that with stocks, and they do that to the downside also. They’re just trying to make money like anyone else. But to blame them for the cause of oil being at $60 is just crazy. Just remember that oil is at $60 for a reason. There is strong demand out there and not enough supply. It’s always a lethal combination for higher prices.
Terry Keenan: Jonas, the last time I looked, the consensus of the smart money on Wall Street is that oil prices are headed down. So what makes you think that all these hedge funds are betting on the long side?
Jonas Max Ferris: A lot of smart people like me have been saying that for a year and it hasn’t come down yet. About $10-20 of a price per barrel is just raw speculation.
Terry Keenan: How do you know that?
Jonas Max Ferris: It’s not all economic demand for gasoline and supply by OPEC and Exxon; it’s people in there bidding and gambling on these prices. And when they stop doing that someday, the price will collapse.
Terry Keenan: Jonathan, all we need is another storm to happen and oil goes up $5 a barrel because there’s so little supply.
Jonathan Hoenig: And it’s the higher prices that bring out new innovations in industry. You know what? Oil prices on an inflation-adjusted basis really aren’t that high. But Jonas is a writer and it sells a lot of newsletter subscriptions.
Jonas Max Ferris: First of all, I have an MBA. Let me just say something else. What you’re saying there is that if money keeps driving into it and the prices keep going higher, eventually businesses like Exxon will say, ‘let’s drill for more because oil prices are higher.’ And then they’re going to leave and it’s going to go back to $10 a barrel and there’s going to be a glut.
Jonathan Hoenig: Jonas, I’m sure hedge funds are going to be shorting it on the way down there.
Terry Keenan: In the interest of full disclosure, Jonathan, you run a hedge fund.
Jonathan Hoenig: I run a hedge fund, yes. And you know what? We’ve made more money than most mutual funds have, so this ideal that ‘hedge funds are evil, mutual funds are your friend, folks,’ is a fallacy.
Rebecca Gomez: Hedge funds are an easy target. This is almost like déjà vu. You had the same thing last summer. They were being blamed for the oil prices. In fact, Wisconsin congressman Mark Green called on the federal government to investigate this. Well the energy department came out just this past March, because the allegations were coming up again, and said, ‘no, it’s not the hedge funds. They may contribute to it, we don’t know to what extent, because they’re very secretive and unregulated, but they do not cause it.’
Charles Payne: Do you know what’s really sad about that? In May, the commissioner of the US Commodities Commission said that hedge funds have nothing to do with this. It’s all supply and demand. That’s like the FBI not going after the top 10 criminals. You’ve got to be kidding me for them to say that hedge funds have nothing to do with it.
Terry Keenan: But whether they’re running up oil prices or not, it’s not against the law. They were right to buy oil futures.
Charles Payne: They also provide liquidity to the market, and they take advantage of inefficiencies in the market, so of course it’s a role for the hedge funds. But to say they are lily-white clean, and that they have a conscience is totally incorrect.
Jonas Max Ferris: If everyone went to Las Vegas and gambled, it’s not against the law, but it’s not good.
Jonathan Hoenig: Charles, what is your point? You’ve made no point. They’re trying to make money.
Charles Payne: The point is that oil is artificially high and hedge funds play a part in that. That’s the point.
Jonathan Hoenig: Because they’re investing in oil futures? They’re investing in the market, Charles, like everyone else. Hedge funds are tiny compared to the world of mutual funds. They’re lily-white? They’re trying to make money.
Charles Payne: I don’t blame them for trying to make money, but the premise of this whole discussion is, ‘is oil too high? Is it realistic at this price?’ And the answer is, no. This is not a supply and demand situation.
Terry Keenan: And yet, Gary, this is a commodity that people use. You need to put it in your car every single day. It’s not like a NASDAQ stock. It’s not like a piece of speculative property. Doesn’t that make the price perhaps more real, reflecting that $60 is what people want to pay to put it in their car?
Gary Kaltbaum: A lot more than a dot-com stock. The bottom line is that hedge funds get blamed for everything and credit for nothing because the media is perpetuating this. And it’s just absolutely crazy to think that there’s this big Oliver Stone-type conspiracy going on to keep prices high. If oil prices want to go back down to $30, they’re going to do it. It’s going to go on it’s own volition, and that will be the end of that. And then, of course, it won’t be to the hedge funds credit.
Rebecca Gomez: You see? The media is always an easy target as well, Terry.
Jonas Max Ferris: There are dozens of hedge fund managers in prison or left the country, compared to mutual fund managers. You can’t say it’s the media; that they’ve caused them to run out of the country. They’ve lied about performance. There are a lot of scams there. It’s not all the media blowing it up.
Best Bets: Jonathan’s Be$T Bet$!
He's tops in the Cashin’ In Challenge and has been as hot as the weather in Chicago! Jonathan has his favorites picks in the market right now. Picks so good, he owns them himself.
• Aspen Insurance (AHL)
Friday’ close: $28.41
Jonathan Hoenig, Capitalistpig Asset Management: I made a lot of money on these utilities, so I’m looking in some other asset classes. My first one is in re-insurance. Aspen Insurance is my pick. It’s a Bermuda-based reinsurance company. A lot of big private equity funds have deals in this. The smart people on Wall Street, many of them hedge funds, are actually getting into the reinsurance business, like Odyssey Re Holdings (ORH) and Montpelier Re Holdings (MRH), which I don’t own. We’re putting our money on AHL, and I think Aspen is headed higher here. I like the sector and I like the stock.
Terry Keenan: Charles, do you like Aspen?
Charles Payne, Wall Street Strategies: Absolutely. This is great. It’s cheap in any type of valuation metric that you use. They pay a high dividend. It’s a tremendous company. I think it’s a fantastic pick.
Terry Keenan: Gary, it’s been going straight up the last six months or so. That’s probably why Jonathan likes it. Are you worried that it’s a little “toppy” here?
Gary Kaltbaum, Kaltbaum & Associates: Actually, no. I can’t argue with this pick. It’s been acting well. The group’s in good shape. I’m a big believe in ‘the trend is your friend,’ so far, so good. And Charles said it best. It’s a very cheap stock at this point. I’m not a guy who talks cheap and expensive, but it seems like the market wants to buy this. I have no problem with it.
• Cohen & Steers Worldwide Realty Income Fund (RWF)
Friday’ close: $20.26
Jonathan Hoenig: My number two pick, Terry, is a closed-end fund. It’s the Cohen & Steers Worldwide Realty Income Fund. It owns international real estate. Yield is about 7 percent. It pays a monthly dividend here. We’ve got a lot of people on this show calling tops in real estate for years now. I don’t see it happening. I think a smart way to own it is through one of these closed-end funds that, if nothing else, you’re going to get a regular income stream. It’s one of my top asset classes right now.
Terry Keenan: Lots of people have called the top too early, but some of the international markets have seen declines that we have not seen here in the U.S. Do you like this fund, Gary?
Gary Kaltbaum: Far be it for me to go against the head honcho, top dog, big cheese today, but 3 months ago I started stating that I do believe we are in the late stage in the move in real estate. And I do like the fact that it pays 7 percent. You have cushion. But I have to tell you, the way prices have gone for real estate for the last couple of years, I’m worried about a little cliff dive if things do turn. So I’m not a big fan right now.
Terry Keenan: And you’re there at ground zero of the boom there in Orlando. What do you think, Charles?
Charles Payne: Gary knows that I like real estate. I happen to like this play. We might be at the end of it, but this one can last for who knows how long. I think you ride the wave with this. It looks like a really well run fund. I like real estate still as well.
• First Trust/Four Corners Senior Floating Rate Income II (FCT)
Friday’ close: $17.77
Jonathan Hoenig: Number three is a totally different asset class, Terry. First Trust/Four Corners Senior Floating Rate Income II Fund. Long story short, 6 percent dividend yield, 7 percent discount to net asset value. There’s a value argument, if you want to make it there. I’m just getting back into this asset class of senior rate loans in general. They weakened, I got shaken out of a lot of them, but to me it’s the best thing in income right now. FCT, Floating Rate Income Strategies Fund (FRA), Floating Rate Income Strategies Fund II (FRB), Eaton Vance Senior Income Trust (EVF), the whole asset class.
Terry Keenan: Do you own all those?
Jonathan Hoenig: Yes, we own all those.
Charles Payne: Jonathan, you mentioned all the great things and the dividends, and the reason for it is because there’s a lot of risk in this particular fund. I don’t like it. I think there are a lot of other ways to play this market right now without this much risk. They have more risk than you’re typical fund. I think most of the viewers out there watching this probably will want to avoid it.
Gary Kaltbaum: It’s got a good dividend. It’s a discount to the market. I have no problems with it whatsoever, and it’s a slow boat, so I wouldn’t worry. I think it’s a very good pick.
Question: "I believe the unions are the reason so many jobs left the country. I used to think they served a purpose, but now I am not so sure."
Rebecca Gomez, FOX News correspondent: Unions themselves know that their very survival is at stake here. You have these two unions breaking away from the AFL-CIO; it’s a very different world that unions face today. America is no longer this huge industrial nation; most union jobs today are in the service sector, for example -- nurses and hotel workers. You can blame the union workers for job losses as far as they are not flexible, and that leads to inefficiency in a company, and they lose money and they’re going to lay off workers. But on the other hand, you can’t blame unions for all of these jobs going overseas, because there’s no way we can pay these dirt-cheap wages here in the U.S. It would be against the law.
Charles Payne, Wall Street Strategies: You don’t have to pay dirt-cheap wages, but some of these unions are unrealistic, like the autoworkers. They have some of the best insurance policies and healthcare policies. They can give a little. If they don’t, they’re going to be out of luck. And this is just going to continue to happen. That’s why the AFL-CIO is in trouble, because they can’t agree on how to attack this problem. They can’t get the benefits that the once got.
Terry Keenan: Jonathan, we have to pay 30-40 percent of our healthcare benefits through our employer. If you’re an autoworker, you pay 5-7 percent
Jonathan Hoenig: Terry, I hate to say it but just because you were a steel worker 30 years ago, business changes, the industry changes and maybe you can’t be a steel worker today. And you certainly can’t get these lucrative benefits that have put companies like General Motors (GM) and the airlines literally out of business. What bothers me about the unions is that they put so much emphasis on man’s labor and not on man’s mind. And I think that the fact that so few people are in unions right now kind of gives an indication of what kind of economic purpose they serve.
Question: "Is John Roberts a Supreme Court nominee that Wall Street is going to like?"
Jonathan Hoenig: If he overturns Roe v Wade, I think this country is in major trouble. That’s my two cents.
Rebecca Gomez: We’re talking about business issues here, and as someone who is a social conservative, for example, like Justice Scalia or Justice Thomas, doesn’t necessarily mean that they are pro business because they ruled, for example, on punitive damages. They are so-called ‘textualists,’ where they take a literal interpretation of the Constitution and they’ve ruled that there is nowhere in the commerce clause of the Constitution that puts a limit on punitive damages. Judge Roberts is not as strict; he doesn’t conform to textualism as much as Justices Scalia and Thomas. So I would think that he would be more pro business than the others, who are as socially conservative.
Question: "If you had a thousand bucks to invest in a Chinese company, which one would it be?"
Charles Payne: I think ‘safe-Chinese’ is oxymoronic, so be careful, OK? Especially with $1,000. Sina Corp. (SINA) is one that I like. A more conservative one is China Yuchai International (CYD). It’s an automaker in China that’s a longer-term hold. It depends on what kind of risk you want. When you play these Chinese stocks, though, be ready for a lot of volatility.
Charles’ China Plays:
Sina Corp (SINA)
Friday’s close: $27.81
China Yuchai Int’l (CYD)
Friday’s close: $13.74
Jonathan Hoenig: One way to mitigate that is to buy a fund. We talked about FXI, I think two weeks ago. This is like buying the SPYders (S&P 500 index) of China. It’s an index fund of the major Chinese stocks like PetroChina (PTR), China Mobile (CHL). Frankly, I wish we had money to play this sector, we’re kind of tied up as it is, but it’s got the wind at it’s back.
Terry Keenan: Do you own the fund?
Jonathan Hoenig: No. We’re not in China at all, but I think if I was going to play China, I’d buy FXI.
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Mutual Fund Face-Off: Pay for College!
What funds can help fund your child's college education? From books to tuition to supplies, college can be really expensive. Jonas, what fund can we buy to help us pay all that off?
Jonas Says: Fidelity Freedom 2020 (FFFDX)
Minimum Investment: $2,500
Jonas Max Ferris, MAXfunds.com: Fidelity Freedom 2020 is traditionally a mutual fund used to retire, because it ages with you and gets more conservative as time goes by. It’s a perfect vehicle for college because right before college, you don’t want to be invested aggressively in case the market tanks. Then you’ll be going to community college. This fund gets conservative as your child gets older and nearer to, essentially retirement, which is going to school, when they need the money.
Terry Keenan: If you have a toddler, right now is about when they’d be going to school in 2020.
Jonas Max Ferris: Right. And you can pick the year. They have funds for 2020, 2015… You can pick any one for when your child is going to college.
Charles Payne, Wall Street Strategies: That’s cute, but we’re talking about children’s education. People get a little defensive about it when you say to be a little aggressive.
Charles says: American Funds New Perspective (ANWPX)
Minimum Investment: $250
Charles Payne: I happen to like American Funds New Perspective, which is a college program. In other words, it’s specifically designed for college. But I also think that people should not be intimidated by going after aggressive funds, particularly when you have really young kids. But if you’re talking aggressive and you’re talking children, people get really nervous. But we’re also talking about outlandish college education fees.
Terry Keenan: Yeah, you have to be a little more aggressive these days because tuition is growing so much faster than inflation.
Jonas Max Ferris: You have to be more aggressive early when you have 15 or so years until college because you’ll never get the kind of growth you’re going to need to pay for these ridiculous costs, but there is a point when someone has got to say, ‘I’ve got to get out of that aggressive fund and get into a conservative fund because it’s a stock fund, and these funds could tank 40 percent if the market crashes.’ And if that happens now, that’s fine, but a year before school and you’re out of money.
Terry Keenan: But then you’re market timing.
Charles Payne: Exactly. That’s why you get into the funds in the first place. If you’re going to pick the market and time the market, you might as well get into stocks.
Jonas Max Ferris: It’s no more market timing than when an older person goes into retirement and they don’t own all stocks either. It’s risky. It’s not even market timing.
Charles Payne: But we’re still talking about 18-year old people here.
Jonas Max Ferris: But they need to spend the money. If you were going to spend it on a house, you’d also want to be conservative right before the actual spending takes place.
Charles Payne: In a perfect world.