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; and Bob Froehlich, chairman of investor strategy at Scudder Investments.
Trading Pit: $4 Gas!
Worried about $3/gallon gas? What if the next stop is 4 bucks! Could the stock market stand the pain?
Bob Froehlich: Paying $4 a gallon gas will have a short-term psychological impact on consumers, but I don't think it will hurt as much as some think. It all depends how much consumers overreact to the sticker shock! Stocks will not tank just due to $4/gallon gas. At the end of the day, it will be as much of a non-event as Y2K—all hype and no real impact!
Tobin Smith: People in Norway and Denmark pay $6/gallon for gas, and their economies are doing okay. However, Bob’s right, psychologically $4/gallon will scare the heck out of people. The economy will slow down, but it is not going to stop. But if prices surprise people and go downward, it’s a buying opportunity. Eventually, if prices go too high, demand will decrease, and prices will go down.
Pat Dorsey: We’re starting to see high gas prices show its impact. Sales of gas-guzzlers and SUVs are slowing and hybrid cars are doing well. But middle-class Americans will be hurt the most. A good way to look at the impact of these prices is to look at Wal-Mart’s (WMT) sales. For about the last 10 years, when gas prices rise, its numbers go down. When gas prices come down, Wal-Mart’s numbers go up.
Gary B. Smith: During the last big spike in oil prices in the 1970s, the stock market did not go down, it flat-lined. That’s what I think will happen right now. I think the market will do the same thing and flat-line again if gas gets up to $4/gallon.
Scott Bleier: At some point consumers will pull back. This will lower corporate profits and make analysts lower expectations. The stock market will suffer and the growth of economy will slow down.
What’s the best way to pay for record high gas prices? Scott, Toby, and Pat say buy these stocks!
Scott: I like VeriSign (VRSN). This company is the gateway to the internet. But in the last couple of months, it has lost 1/3 of its market value due to missing its earnings by $20 million in the last quarter. Part of VeriSign’s business is ring tones for cell phones, so the stock is very volatile and trendy. It has gotten hammered. I own it and think it’s going to $30.
(VeriSign closed on Friday at $21.34.)
Tobin: The “secret” part of their business is RFID (radio frequency ID devices) because it will be huge over the next few years and VeriSign is going provide the connection. I’d love to buy the stock under $20. But be careful, because if it has another piece of bad news, and it could go to $12-$15.
Pat: I think VeriSign has a great business and agree with Scott that it should go to $30.
Tobin: Energy Conversion Devices (ENER) is my pick. The company makes solar cells for batteries that are used in hybrid cars. I own the stock and think it could go to $45 because its batteries are going into the all of hybrids in the U.S. It also has developed a Hydrogen motor that works very well. (Energy Conversion Devices closed at $31.21 on Friday.)
Scott: This is overvalued, hasn’t made any money, but it will go higher because it has all the businesses that investors go crazy for with the high price of oil.
Pat: I wouldn’t go near this stock. Its track record has been pretty ugly for a long time.
Pat: My choice is Avid Technology (AVID). It’s the dominant player for high end video editing. A lot of large broadcaster use it and will have to upgrade to HDTV in the next few years. This is going to create an enormous demand. The stock got whacked a couple weeks ago because customers postponed orders, but they will have to buy this stuff! I own it and think Avid is going to $55 in a couple of years. (Avid Technology closed at $36.52 on Friday.)
Tobin: Pat is right, it did get hammered, and might fall another 10 percent, but it’s a good stock to buy now.
Scott: The chart looks awful, but if you’ve got time and willing to wait, it’s a good buy.
What's soaring even faster than gasoline prices? College costs! Gary B. and Bob each pick the stocks they think will help to pay for out of control tuition costs.
Bob: I have the perfect college stock: Domino’s (DPZ)! It has had nice revenue growth and has been profitable. The company has stuck to its basic strategy. Make one product and put it in two places: colleges and military bases. I own this stock. (Domino’s closed at $22.65 on Friday.)
Gary B: The stock just broke below a sharp uptrend it had been in since the middle of this year. I think Domino’s needs to drop to about $20 before I’d buy.
Gary B.: I like (and own) General Motors (GM). The stock pulled back a long uptrend line it has followed since the 1980s. I think GM will hit the $60s for the class of 2009. (GM closed at $34.14 on Friday.)
Bob: There’s a reason the stock pulled back. GM doesn’t make any money! Its debt to equity ratio is 5 times the industry standard and 10 times the S&P 500 standard. Nothing works for them. They can’t give away cars! This is a horrible stock.
Bob: My other pick is Best Buy (BBY). The stock will take off with kids going back to school and also is a lagging way to play the housing market. Think about this, first people buy their house, then, they buy the “stuff” for it. I own this stock too. (Best Buy closed at $46.01 on Friday.)
Gary B: Best Buy shot up 60 percent this year, but now is in a free fall. I’d buy when it hits a new high over $53 or if it bottoms out.
Tobin's prediction: Cold winter means $80 oil; Dow 9500 by Christmas
Scott's prediction: Martha's done! Martha Stewart Omnimedia (MSO) down 30 percent by year-end
Pat's prediction: Bow wow! PetSmart (PETM) up 40 percent by next year
Bob's prediction: Gap (GPS) up 10 percent by spring break
Gary B's prediction: Abercrombie (ANF) is "so over"; sell now!
Cavuto on Business
Neil Cavuto was out this week. Dagen McDowell was joined by Jim Rogers, author of "Hot Commodities"; Ben Stein, author of "Yes, You Can Still Retire Comfortably"; Tom Adkins, founder of CommonConservative.com; Tracy Byrnes, New York Post Business Writer; Bo Dietl, Chairman of Beau Dietl & Associates, and author of "Business Lunchatations"; Gary Kaltbaum, President of Kaltbaum & Associates, Chris Russo, senior vice president at GunnAllen Financial; Col. David Hunt, FOX News military analyst.
Dagen McDowell: Assassinate dictators instead of fighting costly wars? Was Pat Robertson on to something? Last week Pat Robertson said why fight a war that will cost billions of dollars when you can just kill the dictator. Tom, does Pat Robertson have a point?
Tom Adkins: You bet he does. But Pat Robertson opened up his big mouth and screwed it up. Now that he's said it, the option is off the table.
Ben Stein: Assassinations are a very bad idea. I, and many others, are of the opinion that JFK's attempt to assassinate Castro is what lead Castro to get Lee Harvey Oswald to assassinate JFK. But, interestingly enough, George Stephanopoulos suggested the very same thing about Saddam Hussein and no one raised their voice about that. This is really a story about the incredible discrimination against conservatives in the media. A conservative can say something perfectly sensible and everybody will jump all over him, or he can say something ridiculous and everybody will jump all over him. A liberal says the very same thing and no one lays a finger on him.
Bo Dietl: Go watch the National Geographic documentary on 9/11 and remember what happened on that day. Also remember that after the Cole was bombed, they wanted to take out bin Laden. We are losing Americans everyday in this fight against terrorism. We have to do what we have to do. If we find out that Chavez has any connection to these terrorists at all, I think we should really do it. The CIA is there and they should be doing their job secretly.
Ben Stein: Bin Laden was a well-known terrorist, thug, and murderer. Mr. Chavez is the constitutionally elected head of a sovereign state.
Dagen McDowell: But the Bush administration did denounce what Robertson said.
Tracy Byrnes: It's not the rules of war. We can't go out and announce that we're going to kill people. And making the Venezuelans mad right now isn't the best thing for our oil situation.
Gary Kaltbaum: First of all I hope I never get on Bo's bad side because wow. I don't know how many Westerns you've been watching, but there's just no way of doing this. And more importantly, you get rid of one dictator and who takes his place?
Jim Rogers: Let me ask you guys, what would happen if someone assassinated President Bush?
Tom Adkins: The next day we'd invade that country and take out their leaders.
Jim Rogers: What kind of policy is that?
Tom Adkins: It's called victory.
Bo Dietl: I'm talking about getting the evidence you need and doing things subversively. There was a guy who was assassinated in Egypt. There was a prime minister assassinated in Israel. Things happen like that.
Jim Rogers: If we kill Chavez, we're going to make a lot of enemies.
Tracy Byrnes: We can't go out there and whack this guy. We are not John Gotti.
Bo Dietl: We're not talking about Chavez specifically. I don't see enough evidence there to whack him. You find out what he's about. He's giving away oil for $40 a barrel to Cuba and Dominican Republic, so he's doing good things too. Let's not whack him right away. But we should watch him.
Gary Kaltbaum: All this talk is crazy. Is this like the end of the Godfather movie where we take out all the bad guys? If you want to start a war, then let's start killing all these dictators.
Ben Stein: Why don't we send the smartest people we have to try and make friends with Chavez. Maybe he can be reasoned with.
Jim Rogers: Let him self-destruct. He's a nut.
Tom Adkins: In the history of the world, 200 million have died in the past century to Socialism. And that's what's at stake here – a man with a socialist idea trying to hurt America.
Bo Dietl: This is about our CIA dropping the ball continuously. I'm talking about bin Laden and Hussein, guys who should've been whacked. This guy I don't know yet.
More for Your Money
Dagen McDowell: Top company execs buying tons of their own stock. If these companies look good to insiders should you buy too?
Time to get more for your money. Chris, you're up first. What do you like?
Chris Russo: I like ITT Educational Services (ESI). There's been about a million shares purchased by insiders in the last six months. They're a technology school coming into season. I like the chart and I think the stock goes a lot higher.
Jim Rogers: Insider buying is a very good way to find stocks to buy, but this is a very expensive stock already. What's going to make it go higher from here Chris?
Chris Russo: I like the chart pattern. The institutions are loading up and it's the season.
Gary Kaltbaum: I like Chesapeake Energy (CHK). The CEO has been buying a million shares over the past 3 months. Of course as you know, oil is a very strong group right now. The worst I can say is it's a little extended, but I still think it's got higher prices to go.
Chris Russo: I'm mixed on this one. I like the company and the chart, but when everyone is running on the energy bandwagon it seems to be maybe the end of the run, or a little pricey here.
Ben Stein: I like Boeing (BA). There's been some selling by insiders, but there's also been a lot of exercising of performance shares. The Boeing execs I've talked to are wildly optimistic about the company, and I own some shares. It's new Dreamliner is a huge hit. This company has unlimited horizons.
Gary Kaltbaum: My only issue with this stock is that insiders really haven't been buying the stock. And by buying, I mean the executives pulling out their own checkbooks and writing those checks, not exercising things. But I have no problem with the company or the stock.
Ben Stein: They're exercising when they don't need to be, and that to me is very similar to buying.
Tracy Byrnes: I like Tootsie Roll (TR) — 80 percent of their voting shares are owned by insiders. Not to mention I think it's a takeover target and upper management is ready to go.
Jim Rogers: Tootsie Rolls are made of sugar and cocoa (chocolate). And the prices of those are going through the roof.
Cost of Freedom
Dagen McDowell: Are things so good in America that fewer people want to join the military making it harder for us to win the War on Terror? Colonel, last week military officials said one of the reasons they're falling short on recruiting goals is because our strong economy makes enlisting less attractive. Are you buying it?
Col. Hunt: No, the army is being lazy. The Marine Corps is a much smaller service, but they know how to recruit. We have very high re-enlistment, but the army isn't going out to the right segment of society for recruitment. You can't blame the economy if you can't recruit soldiers.
Dagen McDowell: But the economy did add 4 million jobs in the last 2 years.
Jim Rogers: That's right, but Col. Hunt is right. It has nothing to do with the economy; it has to do with the war. Would you go? You'd have to spend at least a year in Iraq. It's a quagmire. We're a mess. Who wants to join up for that?
Ben Stein: I get a lot of emails from people in the armed forces and some say they go because they want to get some kind of job training. I think this is an occasion to raise military pay. We have too low taxes on the very rich like Jim and Gregg. And we have not enough pay for people in the military.
Tom Adkins: Strong economy brings in more money to the Treasury and that makes this war much easier to afford. If I have a guy in a fox hole next to me, I don't want him motivated by money. I want a guy who wants to save the world, not a few bucks.
Col. Hunt: That's not the point though Tom.
Tom Adkins: Things are going great in Afghanistan and Iraq.
Jim Rogers: You think things are going great in Afghanistan and Iraq? I urge you to join up then.
Col. Hunt: The quagmire issue is crap. Re-enlistment rates are high in all the services because the men and women enjoy what they're doing. Ben is absolutely right. You should pay guys more for risking their lives.
Ben Stein: If a man or woman has the incredible decency and honor to go serve his country, then let's pay him a living wage that's sensible.
FOX on the Spots
Chris Russo: Dow drops for 2 months, THEN rises to new high!
Jim Rogers: History shows Greenspan is worst Central Bank head ever!
Ben Stein: George Allen will be the GOP nominee in 2008
Tracy Byrnes: The AMT or "rich tax" stays. Flat tax follows!
Gary Kaltbaum: Japan's hot! Buy iShares MSCI Japan (EWJ)
Forbes on FOX
Flipside: Trial Lawyers Cost Americans More Than Gas Prices!
Rich Karlgaard, Publisher: Gas prices are a big inconvenience but trial lawyers are a cancer to the system. They undermine everything we value: trust, innovation and risk. While gas prices are going to come down, the damage trial lawyers have done to companies like Merck, which will kill innovation for new drugs, will last for a long time.
Lea Goldman, Staff Writer: Everyone blames the lawyers until they actually need one. It's such a distraction. Lawyers aren't the problem. Look at the executive suite of pharmaceutical companies like Merck if you're looking for someone to blame. They were the ones deliberately withholding information and putting their patients at risk. Don't point the finger at tort lawyers.
Steve Forbes, Editor-in-Chief: Trial lawyers are in it for themselves. There's no relation between damages done and rewards paid. In the case of Merck, the jury ignored all the medical stuff that they couldn't understand. They just wanted to go after Merck. That's wrong! Trial lawyers will not stop. They don't go after justice, they go after deep pockets and their own enrichment.
Dennis Kneale, Managing Editor: Lawyers do not cost us more than fuel prices! Oil has doubled in price in two years. We spent $350 billion on oil last year. In the Federal Court system of the entire nation, in terms of people who sued, only 800 cases were decided. It's down 60 percent in 20 years. Half the cases were decided for less than $200,000. And the plaintiff who was suing won in less than half the cases.
Steve Forbes: Dennis doesn't add up the damages. If he did he'd have 2 percent of our Gross Domestic Product. Oil prices go up and down. Trial lawyers prices go up and up.
Stuart Varney, Host: The average person spends $1,043 on gas a year. Tort lawyers cost the average person $938 a year. That does not include the cost of defensive medicine and good drugs that never make it to the market.
Rich Karlgaard: You can't measure the thing that didn't happen. Like when you get cancer and that new drug isn't available to help you because Merck or other pharmaceutical companies were too frightened to bring this drug to market.
Elizabeth MacDonald, Senior Editor: Remember, gas is still off its 1980 high and you can control your gas costs by not buying guzzling SUVs. The cost of the tort tax is $280 billion a year, that's bigger than the GDP of Greece. The lawyers take $40 billion of it. That's bigger than the sales of Intel.
Jim Michaels, Editorial Vice President: Their take is more than $40 billion because they take expenses off the top. That's probably another $20 billion. In asbestos, for example, the lawyers have taken $200 billion out of the system, bankrupted 80 companies, cost thousands of jobs. And of that $200 billion, only $50 billion went to victims. The rest went to phony victims and to lawyers.
Lea Goldman: It's misleading to say that those costs are sustained by customers. They are not. They are sustained by the insurers and the pharmaceutical companies.
Steve Forbes: Who do you think pays for the insurance? The consumers!
Jim Michaels: Every time a doctor loses a big lawsuit the insurance bill goes up and he or she has to pass that cost on to the consumer.
Dennis Kneale: The fact is, Merck screwed up in the Vioxx case. Merck knew this drug was dangerous. That drug has killed 20,000 to 50,000 people who would not have had a heart attack without it. They should have to pay something.
Rich Karlgaard: Good grief! It didn't even kill the guy in the lawsuit. The guy in the suite died of an arrhythmia. He didn't die of anything Vioxx related.
Dennis Kneale: When your mother dies the first thing you are going to do is file suit against Merck.
Rich Karlgaard: When my mother gets cancer I hope the American pharmaceutical companies are there with drugs. Dennis, you're going to drive innovation off to South Korea and China.
Dennis Kneale: Lawsuits are there to regulate business in some way.
Elizabeth MacDonald: The whole system is jammed. We do not have a tort system. We have a wealth redistribution lottery. It's out of control and Congress needs to step up to the plate.
In Focus: Death to the Death Tax?
Mike Ozanian, Senior Editor: The death tax is unconstitutional. It's cruel and unusual punishment. Someone works all their life, paying taxes along the way so they can leave a nest egg to their children and then what happens? They die and the government comes along and takes a big chunk of it.
Jim Clash, Associate Editor: The death tax is one of the last levelers between the very rich and the very poor that we have in this country. Do I want Paris Hilton to inherit all of her parents money and start way ahead of everybody else? I don't think that's right. Also, the rich pay the death tax which helps make the rest of us pay less taxes.
Steve Forbes, Editor-in-Chief: The death tax hits people who start small businesses, who own houses and own 401ks. It also cost more to try and comply with that tax or get around that tax than the government actually collects. The motive here should be no taxation without respiration. You've paid taxes all your life. You should be able to leave this world without being molested by the IRS. As for the Paris Hiltons of the world, god bless them. They recycle that money far faster than trust funds ever would.
Jim Michaels, Editorial Vice President: I love my children and grandchildren and want to do everything I can for them. But I don't think when I'm done with my resources there is anything wrong with paying some back to the society where I made them. If I don't want to pay them in taxes, I can leave the money to a worthy cause. We need an income tax reform, we need a flat tax we should leave this one alone.
Victoria Murphy, Staff Writer: The estate tax encourages someone like Paris Hilton to spend frivolously while they're alive because once her parents are gone, Uncle Sam will take half of the loot. The estate tax is double taxation. People do wonderful things with their money. People don't want to squander their money on their children if they don't spend it well.
Neil Weinberg, Senior Editor: Why should people who are born lucky get to be rich?
Steve Forbes: Why not chop off the arms of Derek Jeter because he's born with baseball talent?
Neil Weinberg: We have enough arms in this country, what we don't have is enough money. The government is running a massive deficit. Our government has promised us more than it can deliver and someone is going to have to pay for it. If you want to cut taxes and cut government revenue that's fine, but someone is going to have to pay the tax.
Jim Michaels: This tax was put in place in the first place to prevent wealth from accumulating in a few hands.
Jim Clash: What happened to the old puritan work ethic? Why should you get to start ahead of someone else.
Mike Ozanian: People work hard all their life so they can leave something to their children. They've been paying taxes on that. Who are you to decide that you don't like the fact that Paris Hilton has money?
The Informer: $Ky High Profits?
Rich Karlgaard: We're talking about risky stocks here but I like Northwest Airlines (NWAC). It's a terribly run company, but they don't have the Southwests or the JetBlues moving into their market. They have a monopoly. If they avoid bankruptcy they are going to quadruple or quintuple their stock's price. But I would only invest in airlines with mad money. Money that I could afford to lose. There is a great upside if it works.
Lea Goldman: I think you have a better chance at playing the lottery than betting on this stock. They're threatened by labor costs and high oil prices and insiders are selling like it's going out of style. What does Rich know that nobody else knows?
Elizabeth MacDonald: If you're looking to go in and get out really quickly pick up Continental Airlines (CAL). Continental has opened up new routes to Beijing, Latin American and Europe. Maybe the cash flow will bump the stock up a bit. When it does, get out.
Victoria Murphy: Continental is a reason not to invest in airlines. They have all the classic problems of airlines and you can't do the quick hit investing method. It's way too risky.
Lea Goldman: I'm looking overseas. I like Ryanair (RYAAY). They're a small Irish airline. This company had done a really good job of controlling costs. Right now they are looking to outfit their planes with gambling. I think this is the best version of in-flight entertainment if ever there was one. This is a stable, profitable company. This is a buy and hold.
Elizabeth MacDonald: This is a company that is controlling costs because it's cheap on customer service. Some of those cost cutting ways are by double booking its flights and using bait and switch advertising. They tell you an advertised price and add on fees and taxes when you show up at the gate. It has routine delays and their flight attendants have to clean the planes so that's why they are rude. You want a stock that's good with customer service and this isn't the one.
Victoria Murphy: I don't like airlines at all, but there is one company that I like that has a lot of planes. FedEx (FDX) is a hugely imaginative company. They've hedged gas prices really well. They are one of the first companies to introduce hybrid trucks for their drivers. They are also doing great in Asia.
Rich Karlgaard: FedEx is a terrific American story but UPS and others have caught up to its technology and its logistics. If you want to play this sector there's a smaller entrepreneurial company with a bigger upside called Yellow Transportation (YELL)
Makers & Breakers
• PerkinElmer (PKI)
Greg Church, Church Capital Management: MAKER
This is a great scientific instrumentation company with a $3 billion market cap. It's very cheap at 17 times earnings. It grows about 18-20 percent a year and has a nice little dividend yield of 1 1/2 percent. I own this stock.
Stuart Varney: You have a 12-month target price of $26. (Friday's close: $19.68)
Elizabeth MacDonald: MAKER
I would put this stock in my baby boomer portfolio, the stocks that are really going to capitalize on the aging of the baby boomer population. It has strong cash flow and it makes great genetic screening products and great medical imaging products.
Jim Michaels: MAKER
I agree, this is a business I want to be in!
Stuart Varney: One word of caution, as a medical company, this stock does have legal risk with all these medical lawsuits we are seeing and government regulation could hurt its pricing power.
• Biomet (BMET)
Greg Church: MAKER
Everyone is going to need some knees and hips down the road. This is the fourth largest maker of orthopedic devices. Historically it's growing at 17 percent and dividends have grown.
Stuart Varney: You think it can go to $45 within 12 months. (Friday's close: $36.84)
Jim Michaels: BREAKER
I think their profit margins are very high and they can't sustain them. I think Medicare is putting pressure on them to keep prices down.
Elizabeth MacDonald: MAKER
It has good cash flow. And they've got a CEO who's really passionate about the business. He visits hospitals and he goes and eats at the company's cafeteria.
Stock Smarts: Oil Burning Homes?
Is there something out there that could take every homeowner by surprise and literally blow the roof off the housing market?
Home prices keep on rising and Americans keep on buying, but the price of oil and gas is rising a lot faster than home prices, and that means much higher costs for home heating this winter. There could be major sticker shock, especially for new homeowners who borrowed to the edge on their mortgages.
Is this a concern?
Jonas Max Ferris, MAXfunds.com: It’s definitely a concern. I think everyone is focused on interest rates, but energy costs actually could be the needle that pricks the energy bubble. And it’s because people are already spending more on gasoline, but the average person buys about one thousand gallons of heating oil to heat their house in the winter. That’s going to cost another thousand dollars over what they paid a couple of years ago. Add that to the thousand dollars on gasoline. That’s a lot of disposable income that is not going into the economy. It comes out of their budgets and they can’t afford more house.
Wayne Rogers, Wayne Rogers & Company: Jonas, you’re wrong. Let me tell you why. First of all, you’re talking about ‘the average person.’ Not everybody lives in a cold place where you’re going to need all that heating oil. Secondly, you don’t know what kind of winter it’s going to be. It may be a warm winter. We don’t know that yet. Thirdly, it’s not that big a deal. That does not deter people from buying a house. These are unconnected costs. It has nothing to do with that. If somebody wants a house, they’re going to buy that house. They don’t even think about the heating oil.
Terry Keenan: And the biggest housing boom has been in the areas where you don’t need too much heating oil.
Charles Payne, Wall Street Strategies: Regardless, even if it was a big deal, Wayne, it’s not a big deal. Anytime people put money into their homes, whether it’s for heating oil, or to buy furniture, or to paint the place, they think of it as an investment. It’s not like when you go fill up your car every other day.
Terry Keenan: You’re not investing when you’re burning oil in your house.
Charles Payne: As long as you are in that home, people rationalize that no matter what.
Jonas Max Ferris: People don’t realize it’s also a liability. The average home is 1,000 square feet bigger than it was 30 years ago.
Charles Payne: No one cares, though. That’s the point. They will cut back on every other thing. They’ll cut back on entertainment, shopping and everything else. As long as they are putting money into their homes, they feel good about it.
Jonathan Hoenig, Capitalistpig Asset Management: Charles, the problem is that they’ve already spent on entertainment and shopping. To Jonas’ credit, what worries me is people who have overextended themselves, who have leveraged themselves and live beyond their means. The truth is, if another $60, $100 or $1200 a year in energy costs crimps your finances, I think you’re cutting life a little too close to the edge. In this housing boom, people have overextended themselves.
Wayne Rogers: Jonathan, those people have already spent that money anyway. They don’t think about it. Charles is absolutely right. That’s a meaningless number. They’re not going to realize it until they get the bill at the end of the month. At that point in time, they might say, ‘oh gee, I’ve got to pay a little bit more money for heating oil.’ That’s not going to deter them from buying a house. That’s just crazy. Nobody thinks of that. You tell me one person you’ve seen who goes up, saying ‘I want to buy a house,’ and then say, ‘oh gee, I’m not going to do this because the heating bill may be high.’ I don’t think so.
Terry Keenan: He has a good point, Dani, but we’re buying cars we can’t afford to fill up. We’re buying houses that we can’t even afford to furnish. It’s getting a little crazy out there.
Danielle Hughes, Divine Capital Markets: Yeah, well you don’t want to be sitting on boxes in the middle of your living room, but the fact is that soaring energy prices are really only going to put a damper on the housing boom. They’re not going to create any kind of crush in the housing market. The bond market continues to keep long-term prices low, and investors are still finding opportunity in the housing market. Back in the ‘70’s we had the same kind of situation where there was a big boom in energy prices and it fueled a huge housing belt in the gas belt of Texas and Louisiana. So we’ve seen this before; it’s not going to hurt the housing market.
Terry Keenan: But, you know, back then people were turning their thermostats down to 66 degrees. I was up in Albany, New York, freezing to death in my bedroom.
Jonathan Hoenig: And Jimmy Carter was wearing a sweater.
Jonas Max Ferris: Yeah, and they were doing well in Texas because they were the ones making all the money on the oil back then. They had a lot of money because they were selling oil in that area. Most people don’t understand the liability that they are into with these houses when the heating bill comes up. Where does the money come from? You talk about interest rates; if the average mortgage goes up about 1 percent, that’s only going to cost about $1,000 extra a year. Gas for your car and heating oil is about $2,000 a year. That’s more than the cost of rising interest rates to help finance a home.
Charles Payne: I don’t disagree with you that it is a problem. I do disagree with you that the mentality of Americans is going to change and that’s going to be the reason the housing bubble falls apart. They’re going to be a million and one other reasons, and yes, Jonathan is right. This is a problem for the overall economy. Consumers are extended, but I don’t think anyone is going to go up to a home and say, ‘what’s the sticker on this thing? How much heat can I save?’ It’s inconsequential for the homebuyer.
Jonas Max Ferris: It can be indirect. They can get that bill, like Wayne said, and be surprised that it’s $1,000 more than it was last year because of the bigger home they just bought. That’s money that is not going to get spent on other things, which could lead to a recession. That would hurt the housing market, if there was a recession, because consumers couldn’t spend on other stuff.
Terry Keenan: Could sky-high oil trigger a recession, Wayne?
Wayne Rogers: You’re talking about a different thing. On the one hand you’re asking if it’s going to discourage someone from buying a house. It isn’t. As I said before, no one has ever put down on their list that they’re not going to buy a house because my heating bill is going to be high. It’s never going to happen. Is it a problem for the economy? Absolutely.
Danielle Hughes: I agree with Wayne. If a shock happens to the market, that is when people will pull back. That’s when you’re going to have inflationary pressure.
Terry Keenan: You mean an oil shock.
Danielle Hughes: Yeah, an oil shock or a shock to the economy in any other way. That’s when you’re going to see that kind of thing happen. It’s not really on the horizon. If energy prices continue to rise, which is what they look like they’re going to do, I think that will just put a damper on the housing market. It’s not going to cause the housing market to do anything.
Jonathan Hoenig: Dani, I wish I saw more REIT’s doing well. We’ve really pared back. We own Cohen & Steers Worldwide Realty Income Fund (RWF), and ING Clarion Global Real Estate Income Fund (IGR) - those are international plays. We own IRSA Investments and Representations Inc. (IRS) ((BELOW 500M)), which is an Argentinean play. I wish I saw the exchange-traded real estate doing better here. ‘Ma and Pa Kettle,’ who own their home and have a lot of equity in their home are going to be fine, but I worry about these people who live life on the margins with the interest-only loans, where everything is adjustable.
Danielle Hughes: That’s right.
Jonathan Hoenig: They’re going to get crushed. They always do.
Terry Keenan: If you could only leverage gasoline and heating oil, I guess we’d all be fine, Jonas. In the meantime, we’re going to endure a whole winter of hearing people complain about their high heating bills.
Jonas Max Ferris: Yeah, and they’ll pay it because you have to, and they’ll complain. Again, that money is not going to be spent on other things in the economy and that’s more indirect, but it could just as easily lead to a problem. We talk about these people in the margin. It only takes people in the margin to get wiped out in real estate for the whole thing to kind of lose the demand in the margin, which drives prices up to ridiculous levels. So you could see all prices fall, even if just those leveraged people get wiped out.
Terry Keenan: But no signs of that so far, Charles.
Charles Payne: No signs of that. What we’re really seeing here is an orderly plateau, if you will, of home prices. If we saw a dramatic decline of 5 percent-10 percent, then, of course, everything is going to go haywire. But, I think we’re going to see the whole thing plateau here over the next 3-4 months. Obviously you’re going to have areas where we implode because they’ve had such a huge run-up, but overall, I think we’re going to plateau a little bit, and that’s not going to scare homebuyers.
Terry Keenan: And Wayne, we know you’ve been lightening up on your vast real estate portfolio for a while now, are you concerned, or do you think we’re just going to plateau, like Charles said.
Wayne Rogers: No, I don’t know. I have been concerned because I know that when you bid prices up to this level, eventually you will, as I’ve said many times on this show, you’re going to have an absorption rate. That’s the first thing that drops. As houses and the life of a house on the market extends itself from 30-45 days, to 3 months, to a year to whatever, then prices will begin to soften and then you will see a contraction in the marketplace.
Question: "Wal-Mart (WMT) is advertising in 'Vogue'. Will going after high-end customers help its business?"
Wayne Rogers, Wayne Rogers & Company: I think it’s nuts. I don’t know the demographics of the ‘Vogue’ buyer or the Wal-Mart customer, but in my mind, those two things sound like the biggest dichotomy in the world. I have no idea why a ‘Vogue’ reader is going to walk into a Wal-Mart. Either Wal-Mart knows something that I don’t know, and they’re very smart because they’re doing this and spending a lot of money on it, or it’s one of the dumbest moves I have ever heard of.
Jonathan Hoenig, Capitalistpig Asset Management: Wayne, how does the stock look?
Wayne Rogers: It’s iffy. Do you like Wal-Mart stock?
Jonathan Hoenig: It looks like dreck, Wayne. This is a dump.
Wayne Rogers: That’s what I’m saying.
Jonathan Hoenig: Dump it.
Terry Keenan: Do you own it, Wayne?
Wayne Rogers: I don’t own it.
Jonathan Hoenig: Terrific company, Terry, but the growth story is over for this stock. The stock’s at $45. If you’re not out by $43, I don’t know what you’re seeing in Wal-Mart right now.
Charles Payne, Wall Street Strategies: I agree with Jonathan about the stock. It does look terrible, but you know when Sam Walton was alive, the only retailer he envied was Costco (COST). They pull off this type of stuff, selling high-end things, and of course Target (TGT) has done very well. But right now, they’d be better off probably advertising in ‘Field and Stream’ than ‘Vogue.’
Wayne Rogers: Jonathan is right. He’s got it pegged. Great company, bad stock.
Question: "Jonathan — Thanks for the call on Chesapeake Energy (CHK). What are your thoughts on Genesis Microchip (GNSS)?"
Jonathan Hoenig: They make the chips for LCD monitors, HDTV televisions. The momentum is with this stock. It’s actually with a couple of these semiconductor stocks like Texas Instruments (TXN) and National Semiconductor (NSM). This thing has doubled since February. A big move has already been made. I hate to chase a name like that, but if you had it, I’d sure try and hold onto it.
Terry Keenan: Would you be trading out of some of your energy plays and into hi-tech?
Jonathan Hoenig: Not into hi-tech, but I’ve lightened up on utilities over the last couple of weeks.
Charles Payne: I love the semiconductors. This week, by the way, Genesis was featured in a big-time newspaper, ‘Investors Business Daily.’ It got a big bump from that as well. This is an area that’s probably very exciting. The only caveat that you’ve got to add is that semiconductors are boom or bust. There’s high volatility, but I think it’s worth a shot here. Buy the momentum.
Wayne Rogers: I would agree. Jonathan is batting 2 for 2. Even ‘Ma and Pa Kettle’ could buy this stock.
Question: "What does the crew think about alternative energy company Energy Conversion Devices (ENER)?"
Charles Payne: This is a great company. Do you know why it’s great? Because there’s a whole lot of alternative energy that’s probably going to come to fruition years from now. They actually make money. They’re doing very well. They’re in a battery area – solar power. They’re very well diversified. It’s a hot stock, though. That means it’s sort of priced for perfection. But I would buy it knowing that you might want to use a really tight stop with it.
Terry Keenan: Would you touch this one, Jonathan?
Jonathan Hoenig: Charles is right. The momentum is there, and you’re a fool to stand in front of a speeding freight train. With the mergers and acquisitions and the private equity deals so hot Terry, you never know when a private equity fund will come in here. I wouldn’t short it, but I worry that if the market in general cools off, momentum plays like this could really lose their hot air.
Question: "I own 10,000 shares of Gateway (GTW). I'm down around 2 percent in my position. Would you hold it or dump it?"
Wayne Rogers: With all due respect, I never would have gotten into this in the first place. Gateway is a falling dagger and it doesn’t have that much further to fall. It’s trading around $2-3 right now. It has been a disaster. I don’t know why you’re in it. If you’re looking for something to trade that may make a fast buck, go to Vegas.
Jonathan Hoenig: Wayne is right. It’s a low-probability trade. People like to scalp a $2 stock for about 10,000 shares. I just can’t see this one. I’d dump it.
Charles Payne: I agree 100 percent. There are a lot of old high-flying tech stocks that are sitting on a lot of cash, and people think that’s worthwhile. You see it with Sun Microsystems (SUNW), you see it with these guys. Stay away from them.
Best Bets: Their Own Buys!
Jonathan's pick: Warner Music Group (WMG)
Friday's Close: $17.72
Jonathan Hoenig, Capitalistpig Asset Management: Phil Collins, Fabulous, Lil Kim, Kid Rock, Cher, REM…These are the people that I’m betting on. It’s Warner Music Group. It’s a recent IPO and a major music powerhouse. They own the rights to 1 million songs. We’ve bought a nice, big slug from a hedge fund. I love the relative outperformance and I foresee a time in the near future where this company really kind of ‘Apple-izes” its holdings. This company owns 1 million songs. If they’re able to cash in on this trend of digital music, they’re going to make a fortune. We own the stock and we like it moving forward.
Terry Keenan: It’s had a nice run since July. Do you like it, Dani, and do you its potential “Appleization?”
Danielle Hughes, Divine Capital Markets: I’m not really crazy about the company. Originally, when they were supposed to go public, they had priced it at $26. Nobody liked that price, so it came all the way down to $17 before it was actually issued. Even then, it broke issue. Until they get a real hook on how to take care of piracy issues, I think this whole industry is kind of in trouble. That’s where they make the most money too, is in digital recording. That’s where you have your biggest margins.
Wayne's pick: Phillips-Van Heusen (PVH)
Friday's Close: $33.11
Wayne Rogers, Wayne Rogers & Company: I just bought Phillips-Van Heusen. I like it. They doubled their earnings. They’ve completed a restructuring. Revenue is up substantially. They predict that they’re going to do 30 percent better this year than last year. It had a pretty good move on Thursday.
Jonathan Hoenig: Wayne, we talked about Wal-Mart looking so awful lately. Do you worry that if the economy slows, then PVH could slow with it?
Wayne Rogers: It’s possible, Jonathan, but I think it’s got a good six-month run here. They’ve already projected what they think they’re going to do for the year and I think that’s pretty solid. They beat first call by a couple of cents, and I don’t see the downside here.
Danielle's pick: Valor Communications (VCG)
Friday's Close: $13.64
Danielle Hughes: I picked Valor Communications. They’re a telecom provider in the rural southwest. The company also just went public this year. It pays a whopping 10.5 percent dividend. They’re earnings have been substantially higher. They’re bringing more to the bottom line, and they’re paying you to wait. That’s why I like this company.
Terry Keenan: Jonathan, you’ve liked some of these telecoms, not most of them in the US. What about this one?
Jonathan Hoenig: Sometimes these big dividends make me nervous, Dani. I don’t really see what the utility is in providing rural telecommunications service when some of these people are going to go for wireless and satellite. I’d rather own Macquarie Infrastructure Co. Trust (MIC), some of the marquee infrastructure funds, than Valor right now.
Charles' pick: Medtronic (MDT)
Friday's Close: $56.68
Charles Payne: I like Medtronic. It’s a medical device maker. I had a buy in it for a long time, but I like it more than St. Jude Medical (STJ), which was my favorite. Not only are they dominating in heart defibrillators, but they’re also in the area of Diabetes. I think it’s a great short-term and very great long-term idea.
Terry Keenan: Dani, it looks like they might have something that can help all the Diabetics out there. What do you think of this play?
Danielle Hughes: The stock’s gotten beat up and I think that they’re going to have problems moving forward with litigious people coming after medical device companies now.
Charles Payne: The stock is up big, Dani. It broke out recently.
Danielle Hughes: It did, so why are you buying it here? Do you think it’s going much, much higher?
Charles Payne: Of course I think it’s going higher. Look at the business model. First of all, their growth margins are improving. These are things that you like. They’re capturing more market share, and they’re in an area (obesity) that’s not just a demographic play, it’s a play for the next 100 years.
Mutual Fund Face-Off
They've picked funds for just about everything. But can Jonathan and Jonas pick funds for each other?
Jonas' fund: Fidelity High Rate Floating Income (FFRHX)
Minimum Investment: $2,500
Jonathan Hoenig, Capitalistpig Asset Management: I’m picking Fidelity High Rate Floating Income Fund. My thesis here is that it’s a diversification play. Most people own stocks, bonds, even some commodities. These leveraged loans, these floating rate loans, I think add a great income-oriented element to a portfolio. I can’t imagine that you own a fund like this.
Jonas Max Ferris: I used to like it. I don’t think now is the time. This fund has brought in over $2 billion. It’s not our favorite category anymore.
Jonathan Hoenig: But how much dos Fidelity Magellan have, Jonas? I mean it’s not like this is hot.
Jonas Max Ferris: Large cap stocks are bigger than these floating rate loans. What can I tell you?
Jonathan's fund: Janus Risk Managed Stock (JRMSX)
Minimum Investment: $2,500
Jonas Max Ferris: If I had to summarize what Jonathan has been good at over the last five years or so, it’s been picking alternative asset classes, which have killed major asset classes. Janus Risk Managed Stock Fund, though is not alternative, this is where you want to be going forward. This is like a fancy hedge fund strategy. It’s been killing the S&P. It’s a very complicated but cheap fund. I think you’d appreciate that end of it.
Jonathan Hoenig: It’s like an enhanced index fund, right? They try to weed out the losers of the S&P.
Jonas Max Ferris: It’s a little more quantitative and complicated than that, and it’s been working. I own it. I own some other Janus funds now, and I hated them a few years ago.
Jonathan Hoenig: But Jonas, as you said, a lot of people have done well by avoiding the S&P. At the end of the day, this thing still owns Johnson & Johnson (JNJ), Exxon Mobil (XOM) – weak stocks.
Jonas Max Ferris: It’s not weak. It’s beating the market this year.