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:" 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; John Rutledge, president of Rutledge Capital; and Tom Adkins of RE/MAX Properties and CommonConservative.com
Trading Pit
Does it seem like déjà vu? The feeling that “you can’t go wrong if you buy now;” hearing that “it can’t fall;” investors borrowing money to buy; and selling for way above asking price. This is the housing market of today. It sounds a lot like Internet stocks just five years ago. Could this housing boom blow up like the Internet bubble?
John: Absolutely, this housing market is in a bubble. The difference is you can live in a house, while you can’t live in stocks. It’s all about interest rates. Rates are down, prices are up and I don’t think they are going to go down any more. Once the boom is over, it could hit people hard especially those that pay too much. Overall, the economy is pretty strong right now. It is the small businesses fed by bank loans that are picking up the slack that housing will leave. This will be very good for the stock market because it will pick up the money that people don’t invest in real estate.
Tobin: Stocks get overextended and ahead of themselves. Clearly, housing prices in certain parts of the country are ahead of themselves. Other countries have gone through this, like Australia and Britain. The economy didn’t blow up. We came down and the rate of change will be close. My biggest fear is that IF we had a housing bubble, it would come down for only one reason: unemployment. Unemployment would skyrocket because we would be heading for a recession. Then, oil prices would fall and it would kill the housing market more than anything.
Pat: This bubble does sound familiar to the Internet bubble of the late ‘90s. I agree with Toby that we have seen this before in other economies. If you are a housing speculator, it will not be good for you, however if you are a housing owner, it won’t be such a big deal. This bubble won’t sink the economy and have as much of an effect as the big dot-com crash. However, people in Miami and California, where the prices keep rising, are the ones that could get hurt. Investors, not buyers, will be hurt — along with people who are borrowing from mortgage companies with poor lending standards. A lot of those are going to blow up big time.
Tom: I make a living at real estate and I’m not worried. I’m still buying real estate. It’s not just a matter of interest rates. It’s a matter of net income rising faster than interest rates are rising. Right now, that’s still happening. I’m taking a looking at the big picture. Over the past couple of years, we’ve been creating wealth at 4-6 percent per year. We’ll still see that. It’s a matter of supply and demand. The one thing that protects housing prices is that people will not sell a house for half of what they paid for it. And they will do that with a stock to get the cash to do something else.
Gary B: Taking a look at a chart of the housing market, housing prices have certainly gone up, but they are keeping pace with inflation. There may be a bubble in certain areas, but not overall. Housing prices are rising along with inflation. At the bottom of the chart, there’s been no fall in housing prices in the last 40-50 years without some underlying reason. In Dallas, prices went down because the oil industry dried up. In California, prices went down because technology dried up. There has to be a reason.
Scott: Housing doesn’t go to zero, but Internet stocks can. The two are not mutually exclusive. Housing prices are a little ahead of themselves, but the Fed is in the process of killing the interest-only loan and the 1-year adjustable rate mortgage (ARM). Now, the 1-year ARM is similar to the 5 and 7-year ARM. You can’t speculate without money any more.
Stock X-Change
America is fighting the battle of the bulge. What stocks will fatten your wallet, as we get thin?
Tobin: I’m fighting fat with pharmaceutical company Sanofi-Aventis (SNY). It has a wonder drug called Acomplia. For a diabetic, this drug cuts weight, helps you quit smoking, and makes triglycerides go down. It hasn’t been approved in the United States yet. It’s not a sure thing, but I think it will become available. If this drug does get approved, this will be the number one best selling drug in America. (Sanofi-Aventis closed on Friday at $44.05.)
Pat: This is a good company and has the best pipeline of the big pharmaceutical companies right now, but I think the approval of Acomplia has been priced into the stock already. Wait for it to go back to the high $30s before getting it. Once it goes down a little, it would be a good one to own.
Scott: I like the company, but it has some risk with a court case going forward for the drug Plavix.
Pat: I like the medical technology company Medtronic (MDT), which has a potential device that is implanted into the stomach that stimulates it and helps control eating. It should be approved in 2008. Half of the company’s top line is made up of cardiac devices. It really is a juggernaut in this business. Plus, its competitor Guidant (GDT) has run into some problems recently. Medtronic is going to $65. I do own the stock. (Medtronic closed on Friday at $54.90.)
Scott: It’s a wonderful diversified company, but I’m not sure how much money will come from this new device. It is involved in all areas of the medical business.
Tobin: The stock’s a little too expensive for me.
Scott: My pick is Inamed (IMDC). The health care products company is merging with another company called Medicis (MRX). It has a lot of products for plastic surgery, but their LAP BAND is what is making a name for them in weight loss. Use of this product is growing very fast. (Inamed closed on Friday at $74.15.)
Pat: The stock is expensive and has had some FTC problems with the Medicis takeover. If it doesn’t go through, the stock is going to get hit pretty hard.
Tobin: I like it.
Chartman
His word on the stock market was good enough for past presidents. Will it pass the test of the Chartman?
John: I really like Exchange Traded Funds (ETFs), which is a basket of stocks that allows you to buy a whole sector. One that I really like and own is iShares DJ US Telecom (IYZ). There will be legislation this year that is going to put telecom capital spending back on the map, including a new telecom law that was just announced. Because of this telecom sector stocks went up $22 billion in value in 2 days. I also like the iShares Dow Jones US Technology (IYW), which owns telecom equipment companies. (iShares DJ US Telecom closed on Friday at $24.02.)
Gary B: The iShares DJ US Telecom is on a great run, but it’s going to be hard to reach its old high. It’s getting near a resistance line and will stall. Now’s not the time to buy.
John: My next pick is iShares MSCI Japan (EWJ). This is another ETF that buys in Japan, which has been a long-term stinker, but has changed monetary policy. Plus, companies in Japan are starting to pay dividends. I own it, and I think it has good prospects. (iShares MSCI Japan closed on Friday at $10.95.)
Gary B: This is a great pick! The chart shows that after sliding down for months, iShares MSCI Japan broke through a downtrend line. This looks solid for future gains!
John: I also really like iShares DJ Select Dividend (DVY), an ETF that owns 100 dividend-paying stocks. A tax law has made dividends more attractive. Dividends will account for 60 percent of total stock market returns in the next 10 years. I own shares. (iShares DJ Select Dividend closed on Friday at $63.25.)
Gary B: I like getting a dividend as much as the next guy, but if you like this, you probably like the Dow, which this pretty closely tracks. The iShares DJ Select Dividend broke down from an uptrend line and is heading down. It’s time to sell because there will be a point at which you can get in lower.
Predictions
Tom’s Prediction: Rate hikes cause recession; Dow down 1,000 by next year
John’s Prediction: Tom is wrong; economy fuels market past 11,000
Tobin’s Prediction: Oil goes to $75; make 50 percent on energy ETF (XLE)
Gary B’s Prediction: Summer slump begins; Nas falls to 2K by Oct.
Pat’s Prediction: Dude! Buy Dell (DELL); back on track after sell-off
Scott’s Prediction: Bid adieu to Baidu (BIDU); down 50 percent next year
Bulls & Bears | Cavuto on Business | Forbes on FOX | Cashin' In
Cavuto on Business
Neil Cavuto was joined by Jim Rogers, author of "Hot Commodities"; Gregg Hymowitz, founder of Entrust Capital; Meredith Whitney, executive director at CIBC World Markets; Herman Cain, author of "They Think You’re Stupid"; Charles Payne, CEO of Wall Street Strategies; and Leigh Gallagher, senior editor at SmartMoney Magazine.
Bottom Line
Neil Cavuto: Home prices have soared over the last three years, up 34 percent. But here's something you might not have heard: in that same time frame small stocks have far outpaced the rise in home prices, up 76 percent as measured by the total return of the Russell 2000 Index. Charles, are small stocks the way to go right now?
Charles Payne: Absolutely. Small stocks are typically growth stocks. Over the last three years, housing has taken on growth stock characteristics, but the small cap stocks have the long-term track record. Over the last ten years they’ve been up over 100 percent.
Leigh Gallagher: The run has gone on in both these markets far longer than people thought. In the case of small cap stocks, which are overlooked, you’re looking at nimble companies that can double and triple even when the economy is growing modestly. They offer something more than the broader market.
Jim Rogers: It’s balderdash. Some small cap stocks have done really well, but that’s not how serious investors invest. You find good value and you buy it. Many small caps have done badly. The fact that they’ve doubled in ten years is 6 percent a year. That’s not a big deal.
Herman Cain: I disagree. Usually small caps are early in their life cycle, meaning they’re more entrepreneurial. They have less bureaucracy and less cost initially.
Meredith Whitney: The valuation on housing and on small caps is way too rich. One of the reasons both have done so well is because money has been essentially free. Greenspan has made it clear he’s going to continue to raise rates, and that’s going to have a negative effect on housing stocks and small caps.
Gregg Hymowitz: Both have benefited from low interest rates. As rates go up it’s going to hurt real estate, but also small caps or growth stocks as Charles said, which are more sensitive to interest rates.
Jim Rogers: Inventories are building up. There’s a glut of housing coming. Interest rates are going higher. I’d be very careful about buying a house.
Charles Payne: You could split the difference and buy small cap housing stocks. Even though they’ve made a huge move, there’s still a lot of room on the upside for housing stocks and the homebuilders. A lot of housing stocks are small cap stocks. They’re expensive in price but they’re trading with P.E.’s of 10.
Herman Cain: You have to look at small stocks individually like you would do with any other investment.
Meredith Whitney: Small cap valuations are still very high. While there may still be some breathing room, you’re not going to see much upside. Investors historically chase value. And value is in large caps right now.
Neil Cavuto: You could’ve made that argument a year ago in June when Feds started hiking up interest rates. Housing stocks have since doubled. And the small caps index is up double digits.
Leigh Gallagher: Absolutely. Also this is a much larger universe. It’s an inefficient market so there’s really room to find hidden gems.
Gregg Hymowitz: I think Charles has a solution. Basically buy small cap housing stocks because they’re still pretty cheap. It’s a win-win situation.
Charles Payne: You know, people are goo-goo over Google, but a lot of these housing stocks are doing much better.
Jim Rogers: Are you saying it’s different this time?
Charles Payne: As a matter of fact it is different. It’s a supply and demand issue. These homebuilders are taking up all the supply. And even when demand wanes, they’re going to be able to handle things a lot differently this time.
More for Your Money
Neil Cavuto: The small stock funds our gang says will help you get more for your money. Herman, what do you like?
Herman Cain: I like Oberweis Micro-Cap (OBMCX) because it has a $1,000 minimum investment. And I like looking out for investments for Main Street not just Wall Street.
Charles Payne: My problem with this is they have all the hot stocks and yet they’re down for the year. That tells me the guy’s probably chasing performance.
Neil Cavuto: But maybe you’re just chasing the latest return?
Charles Payne: No, it just tells me that he wasn’t positioned before these stocks made big moves. I like Van Wagoner Small Cap Growth (VWMCX) and I want to say up front that this is high risk. Small telecom equipment type companies like Nortel are going to make big percentage gains.
Jim Rogers: If you’re going to buy something like this, why don’t you wait till it crashes?
Charles Payne: It has crashed. It’s down 9 percent for the year. Now’s the time to buy it on weakness.
Leigh Gallagher: I think risky is one thing, but you’re talking about chasing performance. This is anti-chasing performance. Over five years the average return is negative 24 percent. The small cap run is 5-years old. I like Munder Micro-Cap Equity Fund (MMEAX). This fund has consistently outperformed in the small cap family.
Gregg Hymowitz: It may have outperformed, but they sure charge a big premium. They have a 5.5 percent front-end load, which I think is ridiculous. Then they add on an annual expense of 1.8 percent. If you’re going to buy small cap stocks you might as well do it the cheapest way possible. I like iShares Russell 2000 (IWM). It’s a cheap way of getting broad exposure in small cap stocks.
Jim Rogers: There’s no question that ETFs are better than mutual funds, but would you buy these things at the top? They’ve had a big run. There are quite a few small utilities out there that are going to be gobbled up. I own 30 or 40 myself. Everybody should buy small utility stocks.
Gregg Hymowitz: I would think someone like you would tell people not to buy stocks based on potential takeovers. That’s a risky game.
Jim Rogers: Hold on. There are sound fundamentals for these companies. They are public utilities. They pay high dividends.
Herman Cain: You have to look at these like anything else. I wouldn’t make the blanket statement you’re making to buy all of them.
Head to Head
Neil Cavuto: Is government sponsored financial aid the "real" reason college tuition is out of control? Time to go head to head. Jim Rogers says yes. Gregg Hymowitz disagrees. Jim, why is financial aid hurting?
Jim Rogers: I grew up in Alabama with four million people. Japan has 125 million people. Alabama today has more colleges than the whole nation of Japan. You know why? Every little town starts a college because they get the money from the government. The government is paying the students. You need financial aid but not everyone should go to college. It’s not right for everyone in the country. Some people should be mechanics. They’d make more money.
Gregg Hymowitz: First of all what we’re talking about is the higher education and learning bill. What is going on is the Perkins Loan program, which costs about $7 billion dollars a year, puts millions of people in low income and middle income families to college every year. I actually went to college under those programs. So they serve a very useful purpose.
Jim Rogers: And you see what you got!
Gregg Hymowitz: Furthermore, what the government really wants to do is cut the budget, but allow students to get more in debt. States have been unable to budget and that’s the reason tuition has gone up. It has nothing to do with federal financing.
Jim Rogers: Have you heard of supply of demand? Many who go to college do not pay their loans back. America was made great by people who worked their way through school. Since these programs have come to pass, America has gone down the tube.
Gregg Hymowitz: The amazing thing about that comment is you’re a guy who’s traveled and sees that the world is becoming increasingly global and competitive. One of the things we need to do more than ever is make sure our kids get educated.
Neil Cavuto: I think Jim’s point is this notion that financial aid is built in and so then is the university’s comfort level in increasing cost because that financial aid comes in. Hence, every year you get increases in the 8-9 percent range.
Gregg Hymowitz: Neil, studies have shown the reason you get those increases is because state budgets, since the economy has been weak although clearly it’s been strengthening…
Neil Cavuto: Oh no, this pre-addresses all that.
Gregg Hymowitz: This conservative policy put out recently that it’s all due to federal financing is, to use Jim’s word, balderdash.
Jim Rogers: Wait a minute, do you maintain that the quality of a university education level has more than doubled in the last seven years?
Gregg Hymowitz: That’s not the question. The question is why have prices gone up.
FOX on the Spots
Charles Payne: Buy when market dips in September; big rally follows!
Meredith Whitney: Fed war on adjustable mortgage market; more hikes!
Jim Rogers: Recent law change makes small utilities screaming buys!
Herman Cain: Federal tax code cripples our economy!
Gregg Hymowitz: Japan's election sparks rally; buy Japanese stocks now.
Neil Cavuto: Natural gas, not the kind exhibited on this show, but the energy stuff, it's the unsung energy hero that no one’s paying attention to. It’s price run-up has been double that of oil. This is the energy product to look at for an investment.
Bulls & Bears | Cavuto on Business | Forbes on FOX | Cashin' In
Forbes on FOX
In Focus: Housing Boom Killer: Rising Mortgage Rates?
Lea Goldman, staff writer: I think ultimately we'll see a slow lingering death of the housing market. It's not going to be the bust everybody is predicting. Even though interest rates are still historically very low, we're starting to see ominous signs. In working-class neighborhoods foreclosures are on the rise. Homeowners are freaking out about their mortgages because of rising rates. I think it's inevitable that the housing market is leveling off.
Dennis Kneale, managing editor: Don't worry about this. Especially if you are in a house that you like. The truth is, interest rates are still at historic lows, even if they go up a little bit. What's more important is how people feel. People feel pretty good about their homes right now and nobody thinks that this roar is going to end.
Quentin Hardy, Silicon Valley bureau chief: To afford a median house in San Francisco you have to earn an income of $236,000. That is a topped-out market. We've had a boom all over the world. Portugal, Australia, you name it, they've had a housing boom. How are these banks going to act when theses packaged mortgages, higher risk than ever, finally go south? It's anybody's guess.
Jim Michaels, editorial vice president: The prices are probably starting to level off already and higher interest rates will keep it flat. But there is not going to be a crash in prices. Everyone is forgetting how strong the underlying demand is. If people want houses and can afford them, they are going to buy them. Now, rising interest rates are bad for speculators because it means that housing prices aren't going to keep going up at the same rate. But there is no worry for homeowners. As long as you have a 30-year fixed rate mortgage, you're fine.
Victoria Murphy, staff writer: 30-year fixed rates are not as common as they once were. In California, over 70 percent of mortgages issued recently have been adjustable-rate mortgages. So for those folks, the cost of living in their homes is rising. That could cause a real bust in California. The rate of adjustable mortgages is also up nationally.
Rich Karlgaard, publisher: The real estate bubble is happening in a few isolated areas. In many parts of the country there has been no bubble. There will be flattening in the hot places but the places that haven't benefited will continue to go up because the economy is in terrific shape.
Lea Goldman: If you live in a frothy market, cash out now! This is a regional phenomenon but the bulk of the population lives in these metropolitan areas. If you're looking to upgrade into a better house or neighborhood I say sit it out.
Jim Michaels: The dumbest thing someone can do is to sell their house hoping to buy it back at a cheaper price. Transaction costs are going to kill you and prices are not going to drop that much. The best thing to do is refinance. Lock in the present rate for 30 years. They're still low.
Dennis Kneale: Remember that in the last year the Federal Reserve raised interest rates like 6 times, yet mortgage rates were lower not higher because there was so much demand and so much competition out there. So it's not always an instantaneous result of higher interest rates. Don't worry about it.
Quentin Hardy: Dennis' argument works if prices continue to go up forever. There are a lot of people right now who have no down payment mortgages and banks have written these loans thinking that the demand will continue. Sooner or later the demand gives out and all these risky mortgages are piled up in banks. Banks are then going to have to tighten on people. If there are buyers out there ready to buy your house, they should sell and rent in those markets where it makes sense to rent.
Victoria Murphy: All this bubble speak. Dennis, weren't you the Managing Editor of Forbes during the tech boom? Didn't you see this?
Dennis Kneale: The tech boom problem was that there were no earnings underneath. There is a real asset with your home.
Quentin Hardy: But if a homeowner isn't paying down any principle and is only paying interest and is betting on a capital gain, then there is no underlying earning there.
Rich Karlgaard: House prices went up during the 1970s when mortgage rates went to the moon. What kills a housing bubble is when the economy tanks and people are out of work.
Jim Michaels: I agree with Rich. The demand is still very strong. Think about houses like stocks. You buy it and you hold it. You don't sell it every time it dips. Forget about the price. Get yourself a good 30-year-fixed rate mortgage and forget all this bubble talk.
Flipside: Social Security Turns 70 and Now's the Time to Kill It!
Quentin Hardy: We have to face some realities. Social Security is turning 70 and it's getting into its dotage. The best thing to do is to stop it now. Cut it up and return it to the investor and just focus people's mind on saving for themselves.
Jim Michaels: Don't kill it. It's very popular. Many people depend on it. Give people an alternative. Let younger people and even middle-age people opt into a private account system. If that happens, then in 10 years Social Security would dry up because people would see private accounts as superior. But don't shove private accounts down people's throats. Keep both systems.
Mike Ozanian, senior editor: Give people their money back and give them the choice. Have them save on their own so that Congress can't spend it.
Victoria Murphy: We need Social Security. Many people depend on it. If you get rid of it you get something like an old person's tax. It will lose political clout. We can't leave those people out on the street. Social Security plays a necessary roll.
Lea Goldman: We made a promise to these older people and it's a promise we should keep. That's the moral argument. On the other side, Americans have voted that they want to keep it. A study just came out that said 80 percent of non-retirees, if given the opportunity to opt out, would choose to stick with this current system. Lets also keep in mind how many senior citizens do rely on it. It's the demographic that faces the least poverty level of any and that's thanks to Social Security.
Jim Michaels: Let's keep it but give people an alternative and in 10 to 20 years, nobody will want Social Security anymore. Private accounts are so much better.
Lea Goldman: I know tons of people who can't even balance their own checkbook. Do they really want to get involved with investing for themselves?
Mike Ozanian: The reason people vote for keeping Social Security the way it is, is because they think that there is some magical account there that has their money in it. There is one budget, the money is used for everything. You should let people take their pretax earnings and put it in their own account. They'll do much better than they would with Social Security.
The Informer: Ga$ Up or Down?
Rich Karlgaard: Gas and oil prices will go down. I have great faith in capitalism. When oil prices get high producers go find more and that is going to reach a tipping point very soon.
Quentin Hardy: Prices are going up. It's a global game. Demand is way up in India and China. The U.S. doesn't seem to care. We still guzzle. On the side of supply, Iraq and Iran are unstable.
Dennis Kneale: We should stop worrying about this. Oil has gone up 50 percent in the past year and the Dow Jones is within 5-10 percent of it's five-year high. It's topped out. It's not going to go up too much and if it does, don't worry about it.
Mike Ozanian: It's going up because it's only about $30 a barrel when you adjust for inflation.
David Asman: Which stocks benefit if oil and gas prices go up or if they go down?
Rich Karlgaard: If prices are going down, buy an industry everybody hates like airlines. I like AMR Corp (AMR). It is up 30 percent this year. Stay in it, because I think it could go to $20. Friday's close was $13.28.
Mike Ozanian: This company has a negative net worth of $600 million, I wouldn't touch it. Since I think oil is heading higher, I like Apache (APA) which gets oil out of the ground. The stock is trading at 10 times earnings.
Dennis Kneale: The problem with Apache is that it's up 70 percent this past year and it's had it's run. I think oil is going down or staying stable and I like Disney (DIS). The theme parks make up 25 percent of their business growth and have made significant gains in the last year.
David Asman: I've been holding this stock for 10 years and it hasn't moved at all.
Dennis Kneale: Well it's about to break out. It has it's problems behind it. You have Robert Iger taking over next month. It's going to happen.
Quentin Hardy: As oil prices go up around the globe, go with the most global company, Exxon Mobil (XOM).
Rich Karlgaard: That's too obvious. Exxon Mobil has been way up, oil has been way up. If you want to be a sheep and come to a slaughter then get Exxon Mobil now.
Makers & Breakers
• J.M. Smucker (SJM)
Malcolm Polley, chief investment officer of S&T Wealth Management: MAKER
J.M. Smucker is a great company. They've have good capital returns. It's largely run by the family. They do a great job of extending some of their existing lines. They've also been doing some acquisitions to add to their stable brand.
David Asman: You have a 12-month target price of $74. (Friday's close: $47.08)
Jim Michaels: BREAKER
It's a good company with good products, the family does own it, but the stock is too expensive. In this market I see no reason to buy it.
Mike Ozanian: MAKER
They have the best preserves on the market and a very strong balance sheet. I would go with this one.
• ONEOK (OKE)
Malcolm Polley: MAKER
A lot of people think of this company as an old line gas utility but it really isn't. About two-thirds of their income is non-regulated, so it really isn't the same old gas utility you think it is. If gas prices go down you will still make money. People falsely believe that when gas prices go down these things are all of a sudden bad investments. That's not true. Utilities are a good play.
David Asman: You think it can go to $44 within 12 months. (Friday's close: $33.32)
Mike Ozanian: BREAKER
They were behind the curve in getting gas assets. Now they're trying to catch up so they're paying a lot of money for natural gas assets.
Jim Michaels: MAKER
Even if oil prices come down, the demand for natural gas in this country is insatiable. They're right in the middle of it. It's a clean play I would buy it.
Malcolm Polley: ONEOK is actually selling their exploration and production assets and this is a good time to be selling those assets for a premium price.
Bulls & Bears | Cavuto on Business | Forbes on FOX | Cashin' In
Cashin' In
Stock Smarts: Energy Cri$i$?
Is another energy crisis in America unavoidable?
We’ve got soaring gas and oil prices, hitting new record highs. There is war and unrest in the Middle East. Sound familiar? It all happened in the 1970s and it's all happening now. Back then it led to an energy crisis with massive gas lines across America. Can another energy crisis happen again?
Wayne Rogers, Wayne Rogers & Company: Well, I think it’s already happened. I think we’re in an energy crisis — to say that it’s about to happen shows that you haven’t paid any attention to history. We have several new elements in the equation, such as China, enormous competition from overseas, we haven’t built a new refinery in this country for over 25 years, terrorism, hurricanes — all of these things over which you have no control. All of that is going to lead to higher energy costs. We don’t have a national policy to think about alternative fuels.
Dagen McDowell: Well Jonathan, back in the ‘70s it was a supply shock with the oil embargo that kicked it off. Today it’s demand driving it. Isn’t that somehow healthier or easier to recover from?
Jonathan Hoenig, Capitalistpig Asset Management: Yeah, I think it is easier to recover from. The fact is that we’re not going to see a crisis unless the government institutes some kind of a national rationing program. People will deal with higher oil prices, but I’ve got to tell you that I think we’re in a new era here. We don’t pay 50 cents for a movie anymore, and we’re never going to pay $1.15 for gas at the pump anymore in our lifetimes. Adjusted for inflation, oil should be at $100 a barrel.
Adam Lashinsky, Fortune Magazine: But Jonathan, the fact is that people are dealing with energy costs where they are. We’ve just gotten through the second quarter earnings and they were fantastic. They were up. So clearly companies are not all that bothered by a dramatic increase in energy prices. Consumers are going on vacation this summer. We’re clearly not in a crisis.
Wayne Rogers: How can you say that when we have airlines going broke because of higher energy costs?
Adam Laskinsky: Airlines are going broke because they run their businesses extremely poorly. Southwest (LUV) makes money. There is a model for airlines to make money, just not the one that they’re doing.
Jonathan Hoenig: Just not the ones that are run by the unions either.
Dagen McDowell: Barbara, Americans are still out buying cars, they’re still filling up their tanks. Demand is up.
Barbara Corcoran, The Corcoran Group: Yeah, and I pulled up in my big SUV and paid $68 to fill my tank last weekend. Am I going to sell my SUV? No. So I want to say that there is an upside, if there is an energy crisis. And that is that when people can’t get their hands on the gas, people will realize we have a problem. And you know what? We’ll think of a solution. We need to have other sources of energy. There are not enough initiatives there.
Stuart Varney, FOX Business News contributor: It’s a crisis when you have gas lines and have to wait 2 days to fill up your tank. The fact is that this is a supply and demand crunch. Right now, the world uses 83.7 million barrels of oil a day. That’s going up to 85 million barrels a day by the end of the year. We’re pumping like crazy. We can’t pump enough. It’s a supply/demand imbalance that’s leading to higher prices. It’s a crisis that I think is looming.
Jonas Max Ferris, MAXfunds.com: If this is an energy crisis, we’ve got an awfully strange way of celebrating it. General Motors (GM) just had a really huge couple of months selling cars that get bad gas mileage. I really don’t think you can call it a crisis if people are willingly going out and buying cars that are at the lower end of the miles-per-gallon scale. In the 70’s we didn’t have a strategic petroleum reserve with ¾ of a billion barrels of oil in a salt mine. We can handle even a supply disruption, which we do not have, by the way, a lot better than we used to be able to. Just because prices are a little higher than they have been historically, does not mean we’re in a crisis.
Dagen McDowell: And Wayne, supplies are at the high end of where they have been over the last several years, at least for oil.
Wayne Rogers: You know, you’re kidding yourself if you think for moment that we’re not already in the crisis.
Jonathan Hoenig: Wayne, we’re not in the crisis,
Wayne Rogers: We’re in the crisis and you know it. When the hurricanes come through and you’ve got cars stacked up forever, you’re already in the crisis and you must learn to deal with it.
Jonathan Hoenig: Go to your local 76, Wayne, and get a gallon of gas. You’re going to pay close to $3 a gallon, but it’s available. I think some of the other guests are alluding to the fact that a crisis is when it’s just not available.
Stuart Varney: ‘Crisis’ may be the wrong word to use.
Jonathan Hoenig: It’s not a crisis; it’s a bull market.
Stuart Varney: It’s not a crisis. It’s more correctly called an ‘energy crunch.’ We’re already paying $3 a gallon for diesel in the San Francisco area. Truckers are paying $3 a gallon there and it’s going to spread nationwide. That is inflationary. That will slow this economy down. It will lead to higher long-term interest rates; it’s a crunch. ‘Crisis’ is probably the wrong word. But this is not a good thing.
Dagen McDowell: Adam, what about going from a crunch to a crisis?
Adam Lashinsky: You alluded to this at the beginning. The only thing that makes a crunch go to a crisis is a huge supply disruption. We have more sources for oil than we did in the 1970’s. We just can’t see, even with what’s happened in the last two years, a major crisis in a supply disruption. Even in the Middle East, we’ve just chugged along. Jonathan was right earlier when he said that.
Barbara Corcoran: I think we have an addiction here, which is a real problem. We are addicted to oil, nothing much is changing, and the only time people are going to realize it is when we can’t get the oil in the gas line. I was in that line, and let me tell you it created havoc in the economy. The addiction we have to break is terrible, and nothing’s going to do it unless we have a deadline and we’ve got to take care of it.
Dagen McDowell: Jonas, are you worried about the increasing tensions with Iran, their nuclear ambitions, Saudi Arabia — the US embassy was closed this past week.
Jonas Max Ferris: There’s your one chance of a true crisis. If Iraq really boiled over bad and became a real civil war, if we had to leave with our tail between our legs, and they were bombing their infrastructure there and it spread to other countries, that’s a crisis. If prices stay high, you’ll see alternative energies become cost-effective. You’ll see hybrid cars become cost-effective. You won’t even need a government policy on it. It will just start working.
Stuart Varney: We’ve only talked about oil and the crunch in oil. What about natural gas? Right now, we’re in August, weeks away from the cold season. We’re now paying 45 percent more for natural gas than we were at the same time last year. Sooner or later, you are going to have to pay a lot more to heat your home with natural gas and home heating oil; all bills up maybe 30-40 percent over last year. You can’t tell me there is no economic fallout from that.
Jonathan Hoenig: Well Stuart, what did you used to pay for a cup of coffee? It used to be 65 cents.
Stuart Varney: That’s different. A cup of coffee is a cup of coffee. Heat in your home is something different.
Jonathan Hoenig: I think the fact is that we’re seeing an inflationary indicator all about. I bought $1 million worth of gold this week. Gold was up something like $10-12. I’ve been off this commodity bandwagon for a long time, but I think the trend is intact.
Wayne Rogers: Jonathan, you can do without gold. People can’t do without heat. You’re making an idiotic argument about commodities. It just doesn’t have anything to do with fuel.
Adam Lashinsky: You know what? In fact, Wayne, people can put on a sweater if they get cold. But seriously, the economy is dealing with this problem right now. This is a manageable problem.
Wayne Rogers: That’s a good solution. Carve up your sweater and feed it to your gas tank. That’ll work too.
Money Mail
Question: "The Fed raised rates again. Is this going to mean anything for the housing market?"
Barbara Corcoran, The Corcoran Group: The only problem I see to the rates going up is not the conventional rate mortgage — we’re still a little above 6 percent. They’ve only gone up less than a point since the whole hoopla has happened. What I’m concerned about is the home equity lines of credit. So many people have used them to fund their kids’ education, built their new kitchen or just gotten spending money out of their house. These people are going to be in for a surprise when their rates keep going up by the month. However, I’m not worried about the housing market because it’s going up just an inch at a time and people can absorb it until you hit a double-digit kind of interest rates. And so, I don’t think it’s that problematic yet except for the people that have big loans on their houses and second loans.
Dagen McDowell: Wayne, we are starting to see a little softness in some hot areas like San Diego. What do you think?
Wayne Rogers, Wayne Rogers & Company: Well I think you’re going to see spotty softness all over the United States. For example, there are certain sections of Florida, as we have talked about many times in the past, real estate is a local phenomenon. You’re going to have bubbles in certain areas, but Barbara is right. When you have these new kinds of mortgages, some of them are negative amortization mortgages; people do not ever pay off a big loan. What they do is refinance it constantly. As a result of that, any bump up their monthly payments is the thing that is going to control the housing market.
Jonathan Hoenig, Capitalistpig Asset Management: And all the people look to me like they’re going to get hung because these mortgage REITs like Thornburg Mortgage (TMA) or Annaly Mortgage Management (NLY) have been decimated. Those things look like death right now. I’ve been making some money in these floating rate funds like Van Kampen Senior Income Trust (VVR), ING Prime Rate Trust (PPR) and Eaton Vance Floating-Rate Income Trust (EFT). We own all of those. They do well in times of rising rates, so I think that you’ve got to be very much hands-off in things that are interest-rate-sensitive.
Dagen McDowell: Adam, are you worried about what Greenspan’s going to do to the housing market?
Adam Lashinsky, Fortune Magazine: It’s not what he’s doing to the housing market so much as it’s what the housing market is doing to the housing market. Barbara is so right. It’s going to be very painful to watch the people at the low end of those riskier mortgages. And I think the only people who won’t be affected by this are the people who are going to sit tight in their homes for a couple of years with relatively long mortgages.
Question: "What does the crew think about Baidu.com (BIDU)? It just had its IPO in early August."
Adam Lashinsky: They’re calling this the ‘Chinese’ Google (GOOG). It was offered at $27, traded at $153, I think, at a high. It’s come down every day since then, but one. This is an extremely dangerous stock. I don’t know that it’s going to behave like Google. I wouldn’t go anywhere near it.
Jonathan Hoenig: It’s just not on my list. There are better ideas right now.
Wayne Rogers: I think Adam is absolutely right. This is a crazy place to be. It’s so volatile. If you had the guts of a gorilla, you wouldn’t even short this one. It’s just scary out there.
Dagen McDowell: Barbara, would you invest in China? What do you think?
Barbara Corcoran: I’m sorry I didn’t, because everybody loves a great story, and this is a great story. ‘The Chinese Google,’ how sexy. I didn’t invest in it, and if another one comes out I’m going to invest, because who wants to be left behind on a ground-floor opportunity? I don’t think it’s going to go anywhere, but it’s a darned good story and that’s why people bought in.
Adam Lashinsky: And that’s why it’s gone up. Because people were so concerned that they missed out on Google. You’re right.
Barbara Corcoran: And can I just add one other thing? Go onto that site. There are no languages. It’s all in Chinese. The only page that’s in any other language is their PR page. Tell us about why you should buy here? Everything else is in Chinese. Google is the Google of China.
Wayne Rogers: There are some better bets in China, too. China Mobile (CHL), China Unicom (CHU), PetroChina (PTR). There are wonderful Chinese stocks. You don’t have to go fishing into the Google of China.
Dagen McDowell: Wayne, do you own any of those?
Wayne Rogers: I own all of them.
Barbara Corcoran: Wayne, they sound so boring. Nobody’s buying them with you.
Question: "What are your thoughts about the two big satellite radio stocks: Sirius (SIRI) and XM Satellite (XMSR)?"
Wayne Rogers: I have owned Sirius in the past and I like both of them. If Ronald wants to pick one, I don’t know why you’d want to pick one. I’m interested in satellite radio, and those are the two. You can take your money and split it. That’s what I would do.
Jonathan Hoenig: I like ‘Baba Booey” and lesbians and Howard Stern and Robin Quivers as much as everyone else, but these are story stocks. They’re so heavily shorted and so heavily favored by the herd. They’re just not on my screen. Not a high-probability trade for me.
"Cashin’ In" Challenge
Check out their stats at: www.foxnews.com/challenge
Cash Count
We looked at the best and worst calls the “Cashin' In” crew has made so far this year.
• Jonas Max Ferris
Best Pick: On 4/15/05, Jonas picked Mentor (MNT). Since then (through the close on 8-12-05): +39 percent
Worst Pick: On 1/10/05, Jonas picked UTStarcom (UTSI) in the “Cashin’ In" Challenge. Since then (through the close on 8-12-05): -49 percent
• Wayne Rogers
Best Pick: On 3/11/05, Wayne picked Akamai (AKAM). Since then (through the close on 8-12-05): +32 percent
Worst Pick: On 3/31/05, Wayne picked Tessera Technologies (TSRA) in the "Cashin’ In" Challenge. Since then (through the close on 8-12-05): -24 percent
• Jonathan Hoenig
Best Pick: On 4/29/05, Jonathan picked Dynegy (DYN). Since then (through the close on 8-12-05): +38 percent
Worst Pick: On 3/11/05, Jonathan picked Spanish Broadcasting System (SBSA). Since then (through the close on 8-12-05): -27 percent
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