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Bulls & Bears
This week’s Bulls & Bears: Pat Dorsey, director of stock research at Morningstar.com; Tobin Smith, editor ChangeWave Investing; Scott Bleier, president of HybridInvestors.com; Gary B. Smith, columnist for Real Money.com; Bob Olstein, president of the Olstein Funds.
Trading Pit: The New "New Deal"
President Bush proposing massive initiatives outlined while addressing the nation Thursday night from Louisiana.
It's probably the biggest and most expensive government program since FDR's New Deal. What will it mean for the economy and stocks?
Tobin Smith: President Bush’s plan is good because it will be great for the economy, and it reduces uncertainty. The President was a late starter, but a good finisher and this new plan restores confidence in him. It will also get Social Security and other issues off the table.
Bob Olstein: Spending is good for the economy, at least in the short run. We’re in an undervalued market right now. This plan will help the economy, but won’t have any bearing on the stock market.
Gary B. Smith: The success of this plan depends on how it is funded. It could potentially be a budget buster because we don’t know how it’s going to be paid for. If spending in other areas is not curbed, the deficit will swell, which will end up being bad for the economy.
Pat Dorsey: Spending cuts will need to happen elsewhere. Here's a crazy thought: How about axing some stuff from the pork-laden highway bill that got passed a couple of months ago? Divert money from projects we don't need - and which have no other purpose than lining the pockets of constituents around the country - to projects we do need in New Orleans.
Scott Bleier: The markets are wary of all this increased government spending, but they know that it is something that must be done. It just needs to be done in a smart way. I think deficit spending will continue, but high oil prices are going to cause the market to bring down earnings expectations. This will be what hurts the market over the next six months. The market just hasn’t realized that yet.
Why Are Stocks Up?
Hurricane Katrina is one of the worst natural disasters in United States history. So, why are stocks up since the storm hit?
Gary B.: In every major event, stocks follow the predominant trend regardless of the news. Stocks had been trending up since mid-year. We thought at the end of last week that stocks were going to go down, but then saw a bounce on Friday. It just continued in the overall trend.
Bob: Katrina was a devastating blow to the people of New Orleans, but the event is only a temporary short-term negative to the market. Eventually rebuilding New Orleans is a long-term positive to the economy. The market is still 5 percent undervalued based on earnings, but earnings will be growing at 5 percent and thus we are in a low return market. The only thing that counts is earnings. However, the quality of earnings and free cash flow are the highest they have ever been.
Tobin: We’ve learned to be optimistic. Stocks are up because investors are anticipating the year-end rally NOW. The year-end rally thesis: the Fed takes a rest; inflation is benign; earnings misses are blamed on Katrina; and the Federal Government’s plan to put $200 billion into the reconstruction effort boosts stocks.
Pat: Stocks are barely up. It’s not going to have a major long-term impact. It takes a lot to dent such a big economy. This is just a speed bump and no more.
Scott: This year is the “Calamity Market”. Every time something bad happens, it seems stocks go up! Stocks are up because everyone expected them to go down. Plus, traders took a page from the July 7 London train bombings and bought stocks instead of selling them. Everyone also expected the Fed to cool it on interest rate rises.
The damage from Katrina was unprecedented. It’s also an unmatched opportunity for companies to rebuild. Which will be key in that effort?
Tobin: I like Camden Property Trust (CPT), which owns a lot of apartments in Houston and Dallas. This is a very good company.
Pat: It has a nice yield at 4.5 percent, but in Houston and Dallas it only had a 6 percent vacancy before the crisis. Only 20 percent of their cash flow comes from that area, which is not a huge amount.
Gary B.: My pick is Shuffle Master (SHFL), which is involved in the casino supply industry. This has an opportunity for huge growth.
Bob: This is a good company, but right now it is fully priced.
Bob: Lumber producer, Weyerhaeuser (WY) will play a part in helping to rebuild. It has many valuable assets including a lot of free cash flow. We own.
Gary B.: This is a good pick for long term, but I’d wait to get it at a cheaper price.
Scott: I like Washington Group International (WGII), which is involved in civil engineering and heavy construction. It’s the perfect size mid-cap stock with no debt.
Tobin: Great idea, but it’s too expensive right now.
Pat: I’m going with Cemex (CX), the dominant cement producer. It has nine times cash flow and I think it has a 20-30 percent upside.
Scott: There is such a shortage of concrete and building products. This stock still has some upside. I also like it.
Brenda: However, it does have some formidable competitors.
Pat prediction: New Orleans gets Super Bowl in 2010
Tobin prediction: New Orleans has Mardi Gras in February 2006
Scott prediction: Katrina victims will be hit hard by I.D. theft
Gary B.'s prediction: New Orleans becomes the new Las Vegas
Bob prediction: Katrina helps insurance companies
Cavuto on Business
Neil Cavuto was joined by Charles Payne, CEO of Wall Strategies; Ben Stein, author of “Yes, You Can Still Retire Comfortably”; Danielle Hughes, CEO of Divine Capital Markets; Leigh Gallagher, senior editor at Smart Money; Price Headley, founder of BigTrends.com; Herman Cain, author of “They Think You’re Stupid”
Neil Cavuto: A new tax to pay for Katrina? Forget it. Some say tax cuts are the answer! Who's right? Herman Cain, to you first. It sounds counterintuitive. Could it work?
Herman Cain: Yes. Yes. Yes. All you have to do is look at the results in the economy over the last two years as a result of the previous tax cuts. But in addition to generating incremental revenues in order to direct them toward Hurricane Katrina relief, it would also continue the momentum that we are already enjoying in the overall economy.
Danielle Hughes: I don’t think that is the case. If you look at states like Alabama, Louisiana and Missippissi the problem is not philosophical. It’s a lack of revenue. The government needs to print 10-year notes and it needs to give that money to the states. What’s going to happen is, yes we’re going to see a rise in interest rates probably of about 50 basis points. It’s going to take liquidity out of the market and it could reduce the housing boom, but that’s what we have to do to help these people.
Ben Stein: I question whether tax cuts are really going to generate more revenue, but I also question the idea of throwing so much at this problem. Already, $60 billion has been thrown out the window, and — as far as I can tell — with zero accountability. President Bush is compassionate to a fault here. I say yes, help the very poor among us, the very destitute among us, but let’s not have the Federal government just throwing money at the problem.
Charles Payne: I like the idea of cutting taxes, but I dislike the idea that every time something goes wrong we have to take from the rich and give to the poor. That’s really not a solution. And by the way, everyone benefits from tax cuts. And Ben, I don’t know if we’re throwing money away. We’re making an investment in New Orleans. The casinos and other buildings that are built are going to generate revenues that will generate jobs. These will be long term for poor people, not just a hand out that’s going to get them from one week to the next.
Ben Stein: Well, I think it’s an investment in their future and they should be paying for it themselves. However, I do disagree with you, I think the rich do owe a duty to the poor, but if I could so respectfully say, why should the middle class subsidize the upper middle class?
Herman Cain: But the whole idea is if you reduce taxes further you not only allow money to be directed to those who need it, but you help the overall economy.
Leigh Gallagher: Cutting taxes to spur economic growth is one thing, but the economy is doing okay. This is a localized problem. If we’re going to cut taxes, let’s cut them for entrepreneurs in the area.
Price Headley: Cutting taxes would work. If you raise taxes, that’s a recipe for disaster. But the problem with cutting taxes is that we already have a good economy. Greenspan is trying to raise rates because they put too much liquidity into the system and they’re trying to pull that back. So I think an aid package is about the only thing that’s going to make sense.
Neil Cavuto: If the folks in this region need this money now, should we care that we build bigger deficits in the interim?
Herman Cain: Spending is a separate problem that we need to address separately. It would help everyone to keep the momentum going in the economy.
Danielle Hughes: Reconstruction costs for this nation are going to put even more pressure on the Federal budget deficit. We continue to spend more than we earn, and it’s a problem that’s going to be inflationary.
Charles Payne: This is an investment in a vital area. It would’ve been nice if the President could’ve named a czar for this project because it seems like everyone’s going to have their hands in this project. But here’s the interesting thing, if the rich get richer that’s also going to lift the poor. That same tide lifts all ships.
Ben Stein: A rising tide does not lift all boats. It doesn’t lift the boats that are underwater. We have some very rich people in this country, and they should be helping the very poor.
Charles Payne: I think they are Ben. Those very rich pay a large percentage of taxes in this country. I think you’re exactly wrong. The very rich do do their part. The very rich do step up to the plate, and America is stepping up to the plate.
Herman Cain: Why is it the government has to make people pay? Look at the contributions people have given willingly.
Neil Cavuto: Yes, but even with all those donations, which are close to $300 million, apparently we’re spending $2 billion a day down there. Is there a role the government has to play?
Herman Cain: It needs to be a government/private partnership. The government should focus on rebuilding infrastructure and then get out of the way. It should not be a 100 percent government bailout.
More for Your Money
Neil Cavuto: Stocks hurt by Katrina that our gang says will come back even stronger. Leigh, you’re up first.
Leigh Gallagher: Harrah’s Entertainment (HET) is the gaming and casino company that actually had the highest exposure to the area of New Orleans. This company gets about 20 percent of its revenues from the Gulf Coast. This is a great time to buy because not only will most of these losses be covered by insurance but Harrah’s has places in Vegas that will get some of that convention business. And Missippissi also gets 10 percent of its state revenue from casino taxes.
Danielle Hughes: Harrah’s stock actually got hit before Katrina happened. Right after their second quarter they didn’t come in where they were supposed to. This is a company that is really committed. I think the company will turn around in the long term.
Price Headley: Tenet Healthcare (THC) is a big hospital operator in the region. It was hit with the bad news of 45 dead bodies found after Katrina, but the CEO says those deaths had happened before or during and that they were in the morgue basically. And I view Tenet Healthcare as coming back.
Herman Cain: Price is right except that they’re not going to bounce back that quick. The whole issue with the dead bodies, you know there are going to be some lawyers swimming around those waters looking for lawsuits.
Danielle Hughes: I’m not too crazy on Tenet Healthcare, but I pick Walgreen (WAG). This company was substantially hit. They lost 49 of their 74 stores. It’s the biggest chain in the region. This is a company that is really committed to the people in the area. It has issued thousands of prescriptions to people in need.
Ben Stein: I love Walgreen. It’s an incredibly well-managed company. It’s in exactly the sweetest spot for future growth.
Herman Cain: I like Chucky Cheese Enterprises (CEC). There’s something I know a little bit about and that’s pizza. That stock dropped 10 percent in 2 days from the day of the disaster until the second day after. Entertainment is going to come back and entertainment for kids is going to come back.
Charles Payne: I like Chucky Cheese, but I also like Marriott International (MAR) for a lot of the same reasons I think Harrah’s is a good play. A lot of these companies with large global footprints are going to bounce back.
Ben Stein: Berkshire Hathaway (BRK.B) is the second largest super catastrophe insurer. It’s down about 10 percent from its high. But this is a company that is very well managed by a guy you may have heard of named Warren Buffett. I think it will come back. It’s had a long slow patch. I like it. I own a fair amount of it, and I’ve been very happy with it.
Cost of Freedom
Neil Cavuto: Your home and most of your possessions: gone ... in a flash. Ben Stein has written several books on protecting assets. His latest: “Yes, You Can Still Retire Comfortably". Ben, you buy a home, invest in stocks, stay married to one person — do all the things you say to do in your book, and then Katrina hits. Do you still retire comfortably?
Ben Stein: You have to have a lot of preparation. There’s a storm warning about retirement just as there is a storm warning about Katrina. The answer is what Samuel Johnson said years ago about being prepared for catastrophes, an old wife, an old dog and ready money. You have to have a lot of liquid assets ready for retirement and lots of liquid assets ready for a natural catastrophe crisis. I strongly recommend that people who can afford it should have a second home in an area that is not going to be subject to the same kind of climatic disturbances as in the first home. I strongly recommend you have a lot of cash stashed somewhere in your home.
Neil Cavuto: But Ben, how many people can really afford a second home? And how many people can build up these kinds of liquid assets particularly in this region of the country? That is wishful thinking at best.
Ben Stein: To tell you the truth, a lot of the well-to-do residents in New Orleans did have second homes and they got out. I’m not saying everyone can do it, but everyone can take a couple thousand dollars and put it in a safe place. So when the ATMs don’t work he or she can go out and get some food even at gouging prices.
Neil Cavuto: I don’t doubt that that’s a viable option, but for many at this point it isn’t an option.
Ben Stein: For the ones who have already been hit by the hurricane it’s too late, but 99 percent of Americans were not hit by the hurricane so they have an opportunity. We have to be very liquid and why not have a second home – it’s an asset that can provide income.
FOX in the Spot
Charles: The “blame games” end when the rebuilding begins
Dani: Rebuilding boosts capital goods and construction
Herman: We are headed for an economic disaster worse than Katrina if we don’t do anything about Social Security, Medicare and tax reform!
Price: Katrina marks a top for oil prices. Sell oil stocks!
Ben: Energy recovers BUT prices remain high; buy the Energy Select Sector SPDR (XLE).
Neil Cavuto: My FOX on the Spot is worry that the government gives money before knowing how well it will be spent , setting a dangerous precedent — spending tax dollars before asking questions or utilizing private funds.
Forbes on FOX
Flipside: Too Much Aid for New Orleans?
Rich Karlgaard, publisher: $62 billion is a staggering figure to start off to help rebuild New Orleans and the Gulf Coast region destroyed by Katrina. The president should have started with $10 billion and demanded an efficient plan with accountability. When that $10 billion is well spent then we can give another $10 billion. And we should cut the pork from the farm and highway bills to pay for Katrina relief and recovery.
Jim Michaels, editorial vice president: We have to be careful not to throw too many federal dollars at the problem. At least $65 billion insurance dollars will go to Katrina victims. The government has to spend whatever is needed to provide relief, but the more the government gets involved in the rebuilding the more corruption and inefficiency will take place. The federal government should set up incentives for local and state governments and private enterprise to rebuild the region. And we should bulldoze the federal subsidized housing projects and instead build private homes with subsidized mortgages so the poor in the region can become homeowners.
Lea Goldman, staff writer: This is a mammoth reconstruction effort and the federal government and state government should take a large roll. If private enterprise takes the lead, you have unfettered regulation that may not help those who were most affected by Katrina. And if you only let private businesses rebuild housing, you'll end up with expensive homes and waterfront property and not enough low-income residences for the poor.
Quentin Hardy, Silicon Valley bureau chief: It's not how much you spend, it's how you spend it. You need a mix, since the private sector can't begin employing people quickly enough. The government is making its mistake in offering big no-bid contracts to the usual suspects. Instead, it should put money into individuals' hands, particularly by employing as many Katrina victims as possible with cleanup and rebuilding work.
Mark Tatge, Chicago bureau chief: There's too much money being spent that will turn into a special interest pork barrel. The price tag could end up costing $200 billion. We should relocate these victims to higher ground so we don't go through this again.
Mike Ozanian, senior editor: A big problem with having local and state governments in charge is that Louisiana is known for corruption. Spending in Louisiana increased by 51 percent after inflation over the last 10 years and none of that money went to proper disaster prevention. We need some guarantees that the billions in aid won't be squandered just like it was before the hurricane hit.
In Focus: Can Our Economy Survive $3 Gas?
Mike Ozanian: $3 gas is great for our economy because it will lead to more investments into new oil discoveries and new technologies to obtain oil from places like the oil shale sands in Canada and drilling deeper into the Gulf. This will increase supply and that will help drive down gas prices in the long term.
Lea Goldman: $3 gas is hurting consumers already. People are adjusting vacation plans because of the high cost at the pump. Retailers, manufacturers and the travel industry are and will be hurt due to less consumer spending from higher energy bills.
Rich Karlgaard: Our economy is not being hurt by higher fuel costs. The Gross Domestic Product growth rate has not slowed much at all since energy prices started rising. $5 a gallon would hurt, but I agree with Mike that $3 a gallon will encourage oil companies to invest aggressively.
Mark Tatge: It's already starting to hurt our economy. Wal-Mart and other retailers said August sales are down. Americans are not going to stop buying gas because they need to drive to work and go to the store, but they will cut back on other spending and that's what cuts into our economy. More airlines are going bankrupted due to high fuel costs and are raising fares. Other companies will pass on higher costs to consumers as well.
Jim Michaels: High gas prices definitely hits consumer spending. And this winter consumers will take a double hit from high prices at the pump and high heating bills. Heating oil and natural gas are going way up.
More Important to Market: Rebuilding New Orleans or Rebuilding Iraq?
Mike Ozanian: Rebuilding Iraq is more important. If you can't defend your own country you don't have a market or economy. Look at what happened after the 9/11 attacks: the stock market plunged and the economy went into a recession. Compare that reaction to what happened after Katrina hit: the market and economy have been stable.
Lea Goldman: Rebuilding New Orleans and Gulf region will pump billions of dollars into the American economy and put a lot of Americans to work. Recent polls show that more Americans think Katrina relief is a higher priority than Iraq.
Jim Michaels: Iraq is a military problem. Rebuilding the gulf region is an economic problem. We can and must do both superbly well. If we run from Iraq, it will confirm the Islam-fascists in their belief that the U.S. is a paper tiger and they can attack us at will. This will weaken the markets because it will weaken people's faith in America. Same with New Orleans. If we mess up there, the socialists of the world and in our universities will see this as a sign that our free enterprise system can't deal with natural disaster.
Both problems are as much a question of execution as they are of money. Iraqi oil will pay for much of the reconstruction there. Free enterprise and private investment will pour into New Orleans if the rebuilding is done right.
Quentin Hardy: Iraq is already a done thing, a mess most Americans now wish Bush had never tried. We are sadly becoming irrelevant to whatever happens there. New Orleans was handled badly, but things can still be made better.
This week, Terry Keenan was joined by: Wayne Rogers of Wayne Rogers & Co.; Jonathan Hoenig of Capitalistpig Asset Management; Dagen McDowell, FOX Business News; Jonas Max Ferris of MAXfunds.com; Barbara Corcoran of The Corcoran Group, and Stuart Varney, FOX Business News.
Did Hurricane Katrina bring a sudden end to the housing boom?
Jonas Max Ferris: It could end the housing boom, and not because of economic things like rising interest rates with all the government spending. It has to do with people’s psychology, and when you see homes under water, it just doesn’t seem like such a “can’t lose” investment. In 1926 we had a massive hurricane in Miami, and it wiped out the only real housing bubble we had in America
Terry Keenan: Barbara, you see homes underwater and you probably see dollar signs from new homes being built.
Barbara Corcoran: Absolutely. Just look at Pensacola, Florida. Last year they had 800 homes destroyed in a hurricane, and they have the biggest housing boom going.
Stuart Varney: I think Katrina opens the door to a shot in the arm for the housing market. We are turning on the money spigot to the tune of tens of billions of dollars. Katrina will not help the housing price boom, but it will help the real estate employment market: plumbers, electricians, home builders. And that’s where economic growth comes from.
Wayne Rogers: You’ve got 150,000 houses that were destroyed. Do you know how many people will be employed for the rebuilding of those houses? It will be a great shot in the arm.
Jonathan Hoenig: I don’t know if Katrina killed the housing market, but I think it sucked a lot of the wind out of it. I’m looking at Fannie Mae (FNM) and Freddie Mac (FRE) at new multi-month lows, and looking at weakness in the mortgage REITs…
Wayne Rogers: But real estate is a local phenomenon. And what we are talking about here is local to the Gulf Coast — and it’s going to be a huge boom for all those people.
Dagen McDowell: It’s not only going to be a local boom for the Gulf Coast. It could help support housing around the country, because you are going to see so much rebuilding, you take man power and materials from all over the place, that constricts supply in hot markets like Florida and even Vegas, and that’s going to keep prices elevated, maybe even higher.
Barbara Corcoran: Everyone is going to get the benefit from the horrible tragedy. Prices in Baton Rouge are up from $200,000 to $230,000 in just two weeks after Katrina, because people are moving. Even prices in Houston, our worst market, are up because people are moving.
Jonas Max Ferris: Detroit had a riot in the 1960s and people panicked, and no one wanted to live there. And that city, which was one of the great cities in America — is still a shell. No one wants to live in an area of chaos that quickly.
Dagen McDowell: But you are already starting to see the opposite happen in New Orleans. You are seeing investors who are trying to find properties in places that are already flooded.
Wayne Rogers: Of course there is an enormous amount of speculation going on down there. All the real estate funds are trying to get in. But the other side of the coin in a disaster is opportunity, and the best thing to happen would be for the federal government not to get in there on an active basis. The federal government should support the private sector, which will do a better job of rebuilding.
Jonathan Hoenig: What worries me, nationally, is that I don’t see the signs for a big new bull market in housing. Prices aren’t moving up, interest rates are higher…
Stuart Varney: There are signs that the boom in housing prices is over. But the other side of the real estate market — employment in the entire sector — is still booming.
Barbara Corcoran: Sadly, only 30 percent of the homeowners in New Orleans had flood insurance, so those people aren’t going to be able to rebuild. You are going to have enormous landmasses in New Orleans that are redeveloped for commercial building and mansions. And these people are going to be forced to sell the land.
Dagen McDowell: Frankly, if the government rebuilds New Orleans the right way, you won’t need flood insurance. You’ll just get homeowners insurance.
Jonas Max Ferris: I just wonder how quick people are going to want to rebuild in New Orleans.
Jonathan Hoenig: If you guys want to buy something speculative you could own a lot of the international closed end funds that I have. But I just don’t think buying a “two-story Georgian” is the way to go.
Wayne Rogers: I wouldn’t commit to buying real estate in the Gulf Coast right away, but I’m someone who is interested in the area, but it really depends on how it is all rebuilt.
Question: "How can the government afford to spend all this money to rebuild New Orleans and the Gulf Coast?”
Jonathan Hoenig: I think there is a negative side to all of this government spending. This can’t be used a Bush’s big chance to right the socio-economic wrongs in New Orleans. The role of government is to clean the place up, secure the place, and rebuild the municipal infrastructure, then get out of the way. The government should not redistribute everyone else’s money into the people who have suffered a terrible tragedy.
Wayne Rogers: The government can’t rebuild as well or as efficiently as the private sector. You have to empower the people who have lived in New Orleans and give them a vested interest to get them to come back to make their city wonderful.
Jonas Max Ferris: I don’t think the government should be spending all this money — we have to borrow all of it. Look what the government did with 9/11 — it’s a pretty bad precedent we started — you can’t just “not pay for the next thing”. And that wasn’t just incentives; people got checks for millions of dollars.
Dagen McDowell: We can afford it if we cut the “pork." It is ridiculous what Congress is spending, what the White House is spending. Cut some of the nonsense in that $286 billion highway bill.
Question: "What do you think about Richard Branson’s plan to build an oil refinery for airline fuel?”
Wayne Rogers: Look — we haven’t built an oil refinery in this country in 30 years. In the meantime, the major oil companies have gotten together to conglomerate — and they still haven’t built any refineries…
Dagen McDowell: As a nation, we need to build a new refinery every year to keep up with how much are gas demand is growing, so let Richard Branson build his refinery.
Jonathan Hoenig: Branson acts like a real “American” entrepreneur. He’s brash, and he wants to get into this business. And bravo to everyone else who wants to get into this business; it’s the competition between these entrepreneurs that is going to make it happen.