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; Dani Hughes, president of Divine Capital Markets
Trading Pit: “Killer” Verdict?
A jury verdict against Merck (MRK) for $253 million hit the drug giant hard. Merck was down about 8 percent on Friday. Could this verdict kill the stock market and maybe thousands of Americans as well?
Tobin: It could be pretty bad, but I don’t think it will be because Merck has common sense. However, if this becomes a zeitgeist of whether or not to take any risk, it could become a problem. Going forward, I don’t think drug companies will become more cautious in the way they develop new drugs. At the end of the day, they have to develop drugs because that’s how the business is viable. The problem is when there’s something like this that is blown way out of proportion, how does it affect the future of the workforce? After school, many of the people that go to work for pharmaceutical companies probably won’t want to work in a business if there’s the potential to get sued.
Gary B: I own Merck. Friday it took a hit and probably will on Monday too, but I’m not selling it. I think this may end up being a Phillip Morris type story. Five or six years ago, everyone thought the stock was going to zero, but Phillip Morris rallied their legal defenses and now the stock is at an all-time high. I would expect and hope to see Merck do the same thing, maybe not in the next few weeks, but certainly in the next few years.
Dani: Friday we saw the market fall off right after this was announced. It is going to affect pharmaceuticals going forward because it’s a risk/reward ratio. Risk is much higher than expected, but Merck knew about this for years. I think that prosecutors are going to keep taking individuals to juries like this. The stock will suffer big fallout and move down to $8-12.
Scott: This verdict is the poster child for tort reform. It’s quite simply ridiculous. If you take a look at drug companies and the way new drugs are introduced, ten years is spent going through the FDA. I think in the future we will start to see labels and disclaimers put on everything.
Pat: I own Merck and I do like it here. First, Texas juries are notorious for ridiculous awards. It will get reduced on appeal, partly because the appeals court doesn’t have a jury, just a judge. Second, Merck could write a $14 billion check today and write $1.5 million checks every year and still maintain its dividend. It has huge cash reserves.
Also, if anyone tries to make the analogy of Wyeth and Fen Phen, there was a proven mechanism of action for Fen Phen and the type of heart damage that it caused. You can look at the heart and say yes, that was caused by Fen Phen. You can’t do that with Vioxx because it’s much harder to prove.
Stock X-Change
What stocks will now be winners on Wall Street because Merck and Vioxx were losers in court?
Dani: I’m looking at risk/reward and companies that appreciate that dynamic. My pick is Corning (GLW). The stock has had a run over the last couple of months and will continue to do very well. I own and recommend. (Corning closed on Friday at $18.92.)
Tobin: It’s not as well known that the company also makes diesel engines, which do very well. I like the stock.
Scott: Corning’s had a good run. Its primary driver is the LCD business, which is peaking for the year. Earnings can’t go up anymore and I think it’s topped out.
Scott: I like Quest Diagnostics (DGX), which is the largest laboratory company in the world and just announced the acquisition of LabOne (LABS). The stock has come off its high and now is a great opportunity to buy. It’s the leader in this field and many insurance companies send patients to get lab work done there. (Quest Diagnostics closed on Friday at $49.98.)
Tobin: I’ll send you to get lab work on your brain! It’s too expensive. Let it come down about 10-15 percent before buying.
Dani: I agree with Scott. Buy it here.
Tobin: I like and recommend eResearchTechnology (ERES), which provides technology and services to pharmaceutical companies. It has automated the process of a cardiogram test, which is more important than ever. (eResearchTechnology closed on Friday at $14.98.)
Dani: I don’t think I would buy it here because Merck is going to create a big free-for-all fall for pharmaceutical stocks.
Scott: I like it. It’s a small-cap speculative stock. Plus, it has a lot of insider buying.
Chartman
Gary B. names the stocks he says are about to get even hotter.
Gary B: First up, Jackson Hewitt Tax Service (JTX), which is the number two player in the tax preparation business. The stock has been moving sideways over the past month, but it just broke out above a resistance line. It’s now in perfect buying position. Going to the mid-$30s. (Jackson Hewitt Tax Service closed on Friday at $25.90.)
Pat: Jackson Hewitt has a really great business. The company is extremely profitable, but the profits come from high interest refund anticipation loans that go to low-income consumers. This exposes them to legal threats. Plus, some states are talking about limiting the interest they can charge, which would really hurt the stock. Wait to buy until it is under $20.
Gary B: NVIDIA (NVDA) is also sizzling. It has had a rocky ride and has generally been going down, but it finally broke through some resistance. Now, it’s ready to buy and is heading up at least another 20 percent. (NVIDIA closed on Friday at $29.20.)
Pat: This stock is similar to Jackson Hewitt, in the fact that it’s not that expensive. The problem is that it’s a much worse business. Product cycles are very short in graphics chips and the company’s had some missteps. It’s also losing share in PC’s to Intel (INTC). This is definitely not a buy.
Gary B: My last hot stock is deCODE genetics (DCGN). This is the classic “strong, getting stronger” stock. It had been trending down, but finally broke out. Buy now because this one is going to the mid-teens. (deCODE genetics closed on Friday at $9.79.)
Pat: This is definitely an interesting company that is involved in the development-stage of biotechnology. It’s burning about $30–100 million bucks a year in cash, but it does have a lot of cash on its balance sheet. The company does have a heart drug that is entering Phase III trials and has a pretty novel mechanism of actions. If this drug gets approved and does well, then the stock does well, but it’s not a done deal. The stock is a lottery ticket right now.
Predictions
Dani's Prediction: Energy crisis coming to U.S.; get ready for gas lines
Gary B's Prediction: Google (GOOG) now a buy; heading north of $300
Tobin's Prediction: Gary B’s chart is wrong; GOOG tanks to $250, then buy!
Pat's Prediction: High risk, high reward; take chance on Archipelago (AX)
Scott's Prediction: In orbit with Orbotech (ORBK); up 30 percent this year
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Cavuto on Business
Neil Cavuto was out this week. Dagen McDowell was joined by Jim Rogers, author of “Hot Commodities”; Gregg Hymowitz, founder of Entrust Capital; Ben Stein, author of “Yes, You Can Still Retire Comfortably”; Kendra Todd, president of My House Real Estate; Rebecca Gomez, FOX News correspondent; Adam Lashinsky, senior writer at Fortune Magazine.
Bottom Line
Dagen McDowell: Forget all the bubble talk. Buy as many homes as you can right now! That's what Ben Stein says about buying a home. So despite all this bubble talk Ben, in your book you say: buy a house and a vacation home, and if you’re handy, buy an investment property?
Ben Stein: Buy a home. We are in a bubble, but you’ll certainly be happier twenty years from now. For the rest of your money I’d put it in stock. But go for the sure thing and buy a house -- homeowners are natural savers -- just don’t expect to make money on it any time soon.
Jim Rogers: People who buy homes are prone towards saving. The tax laws in this country encourage people to buy homes, but I wouldn’t buy a home in many parts of the country like Massachusetts and California right now. You’d be nuts. Rent in those areas until the timing is right.
Ben Stein: But how can you possibly know? Timing the real estate market is extremely tricky.
Jim Rogers: Buy a home in Iowa.
Ben Stein: But we don’t live in Iowa.
Gregg Hymowitz: Yes, we’re all going to go buy a home in Iowa right now! Home prices are at their top here. Interest rates are continuing to go up. Mortgage rates are higher. At some point, the free money is ending. You’re not going to have the big upside you’ve had over the past decade or so.
Dagen McDowell: But mortgage rates are incredibly low right now. They’re below 6 percent.
Kendra Todd: Real estate is truly a regional phenomenon. Areas like California are unaffordable to the masses. I’m a proponent of home ownership. I put most of my money into real estate.
Adam Lashinsky: People should buy a home right now if they can afford it and if they plan on staying there for a reasonable amount of time. Ben is being very sensible, but the problem is there are all sorts of people out there who aren’t being sensible about buying their homes. They are stretching to buy, and may very well may get hurt in the near term.
Rebecca Gomez: That’s the problem. A lot of people are treating real estate like a hot stock in the dot.com era. And they’re buying these properties just hoping the prices will go up even more so they can flip them. It’s just like margin trading during the dot.com boom. People are over extending themselves.
Jim Rogers: Rebecca is right. If you go on the Internet, you see people flipping even before they’ve bought the condo.
Gregg Hymowitz: Renting is looking far more attractive right now.
Adam Lashinsky: There is something to be said for owning your home. You get to put up the paint you want, the art you want. You can’t necessarily put a dollar on that.
Gregg Hymowitz: That’s very emotional. I applaud your sensitivity about that.
Jim Rogers: There’s also something emotional about going bankrupt and losing your home. In the early 90’s, a lot of people lost their homes completely because they were speculating in a bubble.
Kendra Todd: The people who are using the interest-only loans are going to get themselves in trouble. The wrappers and the flippers are going to get hurt because they’re misusing real estate as an investment. But in areas like Florida, we’re running out of waterfront and it’s not like they’re building anymore waterfront.
Ben Stein: You should not be speculating in houses right now. Buy what you can afford to live in and with the rest buy stocks.
More for Your Money
Dagen McDowell: Stocks that get hotter as the weather gets colder! Our gang's got the names to help you get more for your money. Jim, a stock that rises when the temperature falls?
Jim Rogers: I like and own ABB (ABB). With the energy shortages all over the world developing, this is a stock that has been beaten down it’s going to be a fabulous stock over the next 8-10 years.
Adam Lashinsky: I used to be so impressed with this stock but it’s growing so slowly now. I know it’s a long-term play for you, but why not go with something proven like General Electric.
Jim Rogers: General Electric is an accounting sham. ABB has been beaten down to 85 percent below its all-time high.
Dagen McDowell: Ben, you’re going north of the border for your pick, right?
Ben Stein: Canada is an enormous exporter of minerals. I like the iShares MSCI Canada (EWC). It moves pretty much in tandem with energy prices.
Gregg Hymowitz: The problem is really only 23 percent of the ETF is oil and gas. Most of it is financial stocks and it trades at a pretty big multiple. It trades at roughly 20 times earnings. So it’s not cheap.
Ben Stein: But you’re also getting the play on the strong Canadian dollar and forestry, which is an enormous play on export.
Gregg Hymowitz: We like a company called Methanex (MEOH). As it gets colder, this company is the cheapest provider of Methanol. So as natural gas prices go up, they’re beating their competition hands down. We own this stock.
Adam Lashinsky: What Gregg is forgetting to tell people is that there’s ton of supply of Methanol coming online all over the world in the next few years. I wouldn’t buy this stock. The price of Methanol is coming down, and so will the stock.
Gregg Hymowitz: It’s already priced into the stock. The stock is already trading at 5 times free cash flow.
Adam Lashinsky: I’d be scared to go with an energy stock right now, but when it gets cold Campbell Soup (CPB) is the soup company with 55 percent of revenue and 65 percent of profits. There’s a turnaround going on in this company. If you want to play the winner, play Campbell Soup.
Jim Rogers: There has been a turnaround going on at Campbell Soup every year for the last 20 years. We’re in a commodity bull market right now, and all of their raw material prices are going to be going through the roof.
Adam Lashinsky: You have to believe in the turnaround now, not over the last 20 years.
Head to Head
Dagen McDowell: A tax on gasoline is pumping up prices by as much as $0.50 a gallon. Is it time to get rid of it? Let's go head to head.
Gregg Hymowitz: Cutting the gas tax will provide immediate relief to working men and women in this country. It’s clearly affecting people’s pocket books now. We’re already seeing ripples of this today. Wal-mart reports disappointing earnings and lowers its forecast. Why? Because of gas prices. It’s affecting the economy.
Jim Rogers: I’m for abolishing as many taxes as we can. But if you must tax something, you must tax consumption. It would cut demand. We have a horrible energy crisis. So let’s tax oil and gas higher and higher.
Ben Stein: We need to hike the gas tax. We have a problem with overdrive and over consumption of gasoline in this country. People just waste gasoline. We need the money from the gas tax. To suggest that we cut that tax means that money will have to come from somewhere else.
Gregg Hymowitz: It’s shocking for a free marketer to say we should raise taxes even higher to affect market demand. You didn’t argue that we needed the money when they cut taxes on the wealthiest people. Should we repeal those tax cuts?
Ben Stein: I have repeatedly said we should have higher taxes on the wealthy and give that money to the people in the military. And I’ll say it again.
FOX on the Spots
Rebecca Gomez: Oil spikes higher if Iraq misses Monday's deadline.
Ben Stein: Economy won't stumble on higher oil prices!
Gregg Hymowitz: Oil falls to $40 over the next 12 months.
Adam Lashinsky: Google's dead money for the rest of the year.
Jim Rogers: Fannie Mae risking trading halt & NYSE de-listing.
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Forbes on FOX
Flipside: Gas Prices Are Dirt Cheap!
Mike Ozanian, senior editor: Let's get some perspective here. Gas prices have fallen from $3.11 in 1981 to $2.60 today, adjusted for inflation. If you don't think that gas is cheap, look at all the gas guzzling SUVs. People are buying more every day. Gas prices are cheap!
Quentin Hardy, Silicon Valley bureau chief: That's incoherent. The SUVs were purchased two years ago when gas was cheap. Look at Wal-Mart's earnings. They were down because gas prices were hurting people.
John Rutledge, Forbes contributor: Oil prices make up half of our gross domestic product compared to what they were 20 years ago. Oil prices are only 4 percent of the consumer price index. An additional $1 per gallon of gasoline is only a 1 percent increase in a person's budget.
Lea Goldman, staff writer: Gas prices have gone up $0.67 per gallon in the past year. If you're telling Americans that's cheap you sound out of touch. Not only does this hurt at the pump but it has a trickle down effect. Now you're paying more for the pizza delivery and the plane ticket, due to companies passing on long rising fuel costs to customers.
Rich Karlgaard, publisher: The gas and oil prices are not hurting this economy one way or another because this economy is not driven by gas and oil. This is an electricity-driven economy. It's technology and services.
Elizabeth MacDonald, senior editor: We have a decent economic growth of 3.5 percent. We are an economy that sells financial services, health care and consulting services. We're not really a manufacturing economy that's reliant on high gas and oil prices.
Quentin Hardy: We've turned all of our farmland into housing. Commutes are up 30 percent in time since 1981. Those longer commutes require more gas and that means more pain at the pump. The cost of the commute is at an all-time high.
Elizabeth MacDonald: High gas and oil prices are going to take $90 billion out of consumer's pockets a year. Interest rates matter more. Refinancing took out $162 billion a year. If interest rates go up, that's where it's going to hurt.
John Rutledge: President Reagan brought fuel prices down in the early 1980s by removing price controls on oil and gas on his first day in office. The only risk we have here from rising gasoline prices is if some politician gets the stupid idea to institute price control or rationing. Taking the controls away made the prices drop last time. This economy is doing fine with these gas prices. We need to stop whining and get back to work.
Mike Ozanian: I agree. Price controls send prices up because they reduce the incentive to produce oil. If prices get so high, consumption will fall off and prices will fall off. We don't need to get the government involved.
Lea Goldman: I think we've lost touch with the people in the heartland who feel this come right out of their pocketbook. If you're losing $20-$30 bucks out of your pocket every week it hurts!
Elizabeth MacDonald: It really does hurt the average consumer but this shows that we really need an alternative energy policy. By 2025 China wants to get 10-20 percent of it's entire energy supply from alternative energy sources. This recent energy bill does nothing to address that.
Rich Karlgaard: I think we should be drilling in north Alaska. We need a new refinery in this country. We haven't had one in 40 years.
John Rutledge: We need nuclear power plants. China understands this and is doing something about it. We need to do things that reduce our use of energy.
In Focus: Is our Stock Market Unstoppable?
David Asman: War, terror and rising energy prices: all three serious threats to stocks over the past 12 months. Yet, our stocks market are up over that period of time. Is it unstoppable?
Rich Karlgaard: We have perfect buying conditions now. The underlying economy is great and Americans feel lousy about it. A Newsweek poll just released stated that 60 percent of Americans feel the economy is in poor shape. The last time we had a good underlying economy and bad sentiment was in the early 1990s and don't you wish you loaded up on stocks then.
Lea Goldman: I'm not as bullish as Rich. Rising interest rates and high oil prices will bring us down. Americans carry on average $7,000 of credit card debt. Now their mortgage rates are rising. And now they have to pay more at the pump.
John Rutledge: Credit has become vastly available in the last year. Especially to mom and pop businesses. This economy is roaring. It's almost unstoppable. To stop it you would have to invoke a stupid policy like rationing, credit control or some type of price ceiling.
Quentin Hardy: If you combine the amount the government is spending and the war they are not paying for, you have the conditions we had in Vietnam and look what happened in the 1970s when those bills came due.
Mike Ozanian: There have only been two things that have been able to derail the economy and the stock market. Inflation or trade wars. Energy prices have never done it, wars have never done it. And if you look at the headwinds on inflation, they're not that bad. Long-term interest rates are down the past year.
Rich Karlgaard: The core inflation rate, which excluded volatile energy and food prices, is still low at 3 percent. It's not that big of a factor right now. We're enjoying a technology revolution and the tax cut revolution and that's the underpinnings of our great economy right now.
Lea Goldman: Rich is excluding gas and food, things that would hurt that number. What about Wal-Mart's weak earnings numbers due to less spending from higher gas prices? If Wal-Mart is hurting now, I'm sure there is more to follow.
John Rutledge: Inflation can not go up as long as we are connected to India and China with fiber optic cable. Wal-Mart is not the stock market. What's interesting is small business is driving the economy up and profits are screaming.
Mike Ozanian: I think that the only person who can derail this economy right now is Federal Reserve Chairman, Alan Greenspan. Inflation is not caused by energy prices, it's caused by too much money in the economy. And if he tightens too much that is going to derail the small business economy.
Rich Karlgaard: Greenspan blasted the dot-com bubble in the 1990s by tightening money supplies, but he also killed telecom and manufacturing. Now he is determined to bring down housing prices. The only thing that would bring a bear market right now would be a trade war.
John Rutledge: Trade war or a big jerk in interest rates would signal a bear market. It's not going to happen.
Quentin Hardy: A realistic plan to pay down debt and keep interest rates low would signal a bull market.
Lea Goldman: Maybe a pullout of Iraq would be a sign of a bull market.
The Informer: Unstoppable Stocks!
Rich Karlgaard: One of the hugest trends is the convergence of technology, media and entertainment. Apple Computer (AAPL) sits right in the middle of that. Hollywood loves Apple's CEO, Steve Jobs. I know Apple has been very hot and is pricey but they have a while to go.
John Rutledge: They've taken a 100 percent personal computer market share product to a 4 percent market share due to their proprietary branding. I think the company's closed architecture is a weakness for them.
Rich Karlgaard: Jobs is a lot smarter now than we was 20 years ago when he made that mistake.
John Rutledge: I like the exchange traded fund, iShares Russell Microcap Index (IWC). It takes the bottom 1,000 companies of the Russell small caps and the next 1,000 smaller companies than that. This is the classic bet on mom and pop companies which are at the heart of the credit boom today. That's why profits are booming.
David Asman: These stocks are very volatile, right?
John Rutledge: Yes, very volatile. This is not for tourists.
Lea Goldman: I have a stock for tourists. I like Microsoft (MSFT). It's still going strong and this is what they have on deck: a new X-box; a new Windows operating system; digital music; and a new desktop search engine to rival Google. And $4 billion in cash.
Mike Ozanian: Microsoft is a sloth that is under attack by regulators. I like Molson Coors (TAP). A year ago Coors, the No. 3 beer maker bought Molson, the No. 1 brewer in Canada. It's very cheap, has big discounts and is selling relative to it's assets.
Rich Karlgaard: The problem is when you walk into a grocery store you see 100 brands of beer and no one can build the kind of brand share they could 20 years ago.
Mike Ozanian: This stock is so cheap. I think it will go to $75 in one year.
Makers & Breakers
• Intuitive Surgical (ISRG)
Rob Lutts, Cabot Money Management: MAKER
Intuitive Surgical is developing a new industry. It's called robotic surgery. Surgeons use the process to conduct less invasive surgery, which allows patients to get out of the hospital quicker and hospitals do procedures cheaper. Everybody's happy!
David Asman: You have a 12-month target price of $95. (Friday's close: $74.61)
Elizabeth MacDonald: BREAKER
I'm a mild breaker. I like this stock but think it's a little pricey at 65 times earnings. Plus we are seeing heavy insider selling right now. I think insiders are seeing this stock at its 52-week high.
Rich Karlgaard: MAKER
I'm a maker with a caveat. This company has had a good run up, but this stock is at the intersection of technology and health care. It's using technology to make health care cheaper. That's a great field to be in right now.
• Zimmer Holdings (ZMH)
Rob Lutts: MAKER
Zimmer Holdings is in the orthopedic business. They make knees, hips and shoulders. Millions of baby boomers are getting into their late 50s, early 60s and 70s. They want to play golf and tennis and need the new joints to be able to do it.
David Asman: You think it can go to $99 within 12 months. (Friday's close: $82.23)
Rich Karlgaard: MAKER
I like this company. The median baby boomer hits 50 years old this year.
Elizabeth MacDonald: MAKER
They are trying to be the gold standard in hip replacement and knee replacement. This is a great stock.
David Asman: A word of caution to investors: government regulators are scrutinizing the health care industry lately and we're seeing more lawsuits against health care companies.
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Cashin' In
Stock Smarts: Freedom Rally?
Will a new constitution in Iraq spark a freedom rally or a civil war sell-off? Iraq's constitution is proving to be as tough as many predicted with lots of in fighting and now a delay. The new deadline to finish the draft: Monday. Jonathan, the constitution is vital to the future of Iraq, but what about America and the stock market?
Jonathan Hoenig, Capitalistpig Asset Management: I think it is important. Eventually we will leave Iraq. And when we do there has to be a solid foundation of law, based on individual rights and property rights. If this law is based on Muslim law, all the work and all the lives lost will have been in vain because we’re going to be back there in 5-10 years anyway.
Terry Keenan: Dan, our own constitution took almost a generation to put together, and that was before word processors, but this has not been going smoothly in Iraq.
Dan Senor, former CPA spokesman: First of all, I’m always amused when I see people back here in the United States expressing concern about the role of religion in the constitution; what the implications are for women, for example, when it took our own country 100 years to get women’s rights, despite the fact that we had equal rights spoken to in the constitution. I think you’re right. It has not been going smoothly. These constitutional processes sometimes take a long time. In post-apartheid South Africa, it took two years to get a constitution. As you said, ours took 12 years. Italy’s took four years. So there will be some bumps in the road. I think if you look over the next three or four months, you could see enormous progress, not only in Iraq, but also in the region. You could see this constitution pass in a referendum in the middle of October. You’re going to see elections in Egypt and you’re going to see Saddam Hussein going on trial, all against the backdrop of Israel withdrawing from the Gaza Strip. I do think the regional implications are significant.
Wayne Rogers, Wayne Rogers & Company: I think this is chimerical. Listen, we’re dealing with a tribal group of people out there. The best you can get out of this is a Federalist thing. This is all eyewash. This is for the benefit of the American people. It is a bad policy. However, you’ve got to go through with it. Ultimately, it isn’t going to work. It’s as simple as that.
Charles Payne, Wall Street Strategies: I think we’re putting the cart before the horse even talking about a constitution in Iraq right now, certainly from an American point of view. We’re wondering why our troops are out there like sitting ducks. I support the war, and a lot of other people support the war, but if you look at the president’s poll numbers, we’re not fighting the war the right way, and certainly a constitution is the last thing that anyone believes in and is not going to be worth the piece of paper it’s written on right now.
Wayne Rogers: He’s right.
Meredith Whitney, CIBC World Markets: But in terms of how the market is going to interpret it, I don’t think the market is focused one bit on the Iraq constitution. In fact, I think the market is focused on Iran and a potential blockade that may occur this fall, and drive oil prices through $80.
Wayne Rogers: Meredith is also right.
Jonas Max Ferris, MAXfunds.com: Yeah, I disagree with that, because I think Iraq’s going to have a civil war eventually. It’s inevitable. The place was held together by an evil dictator. Every major conflict we’ve had; Vietnam, Korea, Lebanon – It’s all because some dictator or colonial power left a power vacuum and then you have a civil war. The difference is that Iraq has an oil output of several million oil barrels a day that are still at lower levels than before we went in there. And if there is a civil war with constant infighting where no one knows who’s in charge, we’ll have to leave and there’s not going to be any oil production. So that will matter to our market when that happens.
Wayne Rogers: I think this group is all right.
Terry Keenan: Jonathan, you say the market will be upset; yet Meredith makes a good point. The market isn’t focused on Iraq here at all.
Jonathan Hoenig: Bond traders might be. I think they’re focused on the cost. And the truth is, as the weeks and the months drag by, with really no progress...
Terry Keenan: The cost? Interest rates are going down. No one seems to care what the cost of this war is.
Jonathan Hoenig: It’s not on my screen. Maybe I’ve got the screen turned upside down. I think that’s starting to be a worry for the market. We’ve talked about oil. And with regard to stocks, we’re stuck back here at about DOW 10,500 - 10,600. Stocks are not off to the races here.
Meredith Whitney: If you look at bonds, the 10 year bonds have gone from over 4.3 percent to now hovering around 4.2 percent and you’ve got incredible demand for high-quality duration paper out of Europe and Japan. That’s not changing. And still the US looks better than any other economy with at least a GDP north of 3 percent.
Jonathan Hoenig: But not the stock markets. The US has been a laggard this year.
Wayne Rogers: By the way, I think Jonathan is right also. I’m serious, in the following sense: the cost of the war is ultimately going to hurt us. You cannot keep spending like this on something that is non productive.
Terry Keenan: Dan, what about the cost of the war? Maybe voters have been looking the other war, but the president’s poll numbers have been suffering here. How do you think this is going to play out in the next couple of months?
Dan Senor: I think the public opinion of what we are doing is slipping, because the American people have the perception that there is no end in sight; that there is no plan for victory. I don’t think the American people are casualty-averse, I think they’re losing-averse. In other words, if they feel that we can win and that we have a plan, they will get behind this even if it means casualties. I want to say something that responds to something I said earlier. If you think that this is some American creation and that the Iraqis don’t want this, explain then how eight million Iraqis literally risked their lives to go vote in last January’s election. It was an amazing thing. The idea that the Iraqis are not engaged or committed to this is really disconnected from what’s going on the ground.
Jonas Max Ferris: I think that’s just it. The Iraqis want it, but they want it so badly that they’re willing to kill each other for it. They weren’t allowed to have it because Saddam Hussein ruled the place, but now there are different groups there who want control and they might fight for that for years.
Dan Senor: But the point is that they’re fighting through the political process. In that region, in the past, when there have been rivalries they played out in violence through sectarian warfare like the kind of thing you’re talking about. What’s different here is they’re actually participating in the political process.
Meredith Whitney: Whenever they get close to getting anything resolved in the constitution, a bus full of people get blown up.
Terry Keenan: Charles, when we saw those eight million Iraqis go out to vote, many of them were women. And they may be disenfranchised through this constitutional process.
Charles Payne: Right. Dan talks about perception, and perception is reality because we’re talking about the Americans. How will the Americans feel about it? Right now, the message we’re getting is that we’re not doing a great job there, and really there is no end in sight.
Meredith Whitney: No, that’s the message that the American media gives you.
Charles Payne: Well, that’s the message we’re getting. That’s the message that everyone feels in this country, whether it’s true or not. And the bottom line is that we’re talking about the fact that there is violence out there. There really doesn’t seem like there’s going to be an end to this thing and as long as it goes into this sort of a lull, I think the American people are going to become more and more dissatisfied by what’s going on over there.
Wayne Rogers: I agree. And Dan, you used the word ‘victory.’ Nobody has defined ‘victory.’ Everybody says ‘win the war.’ Nobody here has defined what ‘win’ means. I haven’t heard that once from anybody in the administration or, for that matter, anyone in the press.
Dan Senor: Look, I think this is a very complicated war, and defining ‘victory’ in the post-September 11th environment war on terrorism is different than defining ‘victory’ in a finite war like World War I or World War II. That said, if you look at the next few months, and you guys are the economic experts in terms of figuring out how the markets will respond to this, but in the next few months, I think investors and the world will be looking at whether or not the Middle East is stabilizing or destabilizing; is it moving in the direction that we want it to or is it moving in the opposite direction? The fact is, between a country in the Arab world drafting a democratic constitution, a tyrant from the Arab world being held accountable by it’s own citizens in a court of law and it being broadcast throughout the entire region, and elections in a country like Egypt, where the president’s been in power there for over 20 years, is significant.
Terry Keenan: Jonathan, you always say the markets are a great predictor/discounter of events. What are the markets telling you about all these things?
Jonathan Hoenig: Terry, some of the hottest stock markets this year have been the Middle Eastern stock markets, like Saudi Arabia and the Baghdad Stock Exchange. The $65/barrel oil isn’t hurting. Anywhere that democracy and individual rights can flourish, you’re going to have prosperity; whether it’s here or in Baghdad.
Wayne Rogers: I think you’re right. $65/barrel oil takes care of a lot of things. Of course it’s a big economy out there. They’re sitting on all the gold as it were.
Money Mail
Question: "I think it's inevitable that oil gets to $100 a barrel by the end of 2005. Anyone agree?" – Bill Bissonette, Bridgeport, CT
Wayne Rogers, Wayne Rogers & Company: I don’t know about $100 oil. That scares me a little. Would I short oil? No. Am I still long some of those stocks? Yes, because all those companies have built enormous cash. We’ve been north of $30-35 oil for a long time. I think we’re going to stay here. I don’t think oil is going to go south.
Jonathan Hoenig, Capitalistpig Asset Management: But Wayne, remember when the NSADAQ was at 2500? If you had said NASDAQ 5000, people would have thought you were smoking the good stuff. The truth is, as you said, trends tend to persist. Oil is in a bull market. Terry, I don’t know about the end of 2005, markets take their time. On an inflation-adjusted basis, oil is actually still cheap. It’s at an all-time high, but adjusted for inflation it should be $100/barrel.
Wayne Rogers: Well, that’s the question. Is $100 the number? Are you betting on that? Are you buying oil futures?
Jonathan Hoenig: I’m not long oil in a big way, but it wouldn’t surprise me if we hit $100 in the next 18 months.
Terry Keenan: Would it surprise you, Charles?
Charles Payne, Wall Street Strategies: Absolutely. $100 this year? That would be surprising. But is oil going to continue to go? Absolutely. Whether it’s the Iraqi constitution, whether it snows in New York in December, there’s going to be an excuse to keep this game going. Ultimately we could hit $100, and that’s frightening. Inflation-adjusted or not.
Terry Keenan: Would that trigger a recession?
Charles Payne: I think so. Absolutely. Between that and interest rate hikes, we’d be doomed.
Question: "How close is Delta Air Lines (DAL) to bankruptcy, and does that give us a buying opportunity for the stock?" – Andrew Richter, Huntsville, AL
Charles Payne: I think what people need to know, particularly the viewer, is that if they do go bankrupt; your stock is not worth anything. There’s an absolute priority rule, which means your stock is thrown out the window. Do you want to take that type of risk? I don’t think you have to in this sort of a stock market. And by the way, on October 17th, the bankruptcy laws change in this country. You’re going to see a whole lot of companies who are teetering that are going to decide to go bankrupt now, before October 17th, because it’s going to be a lot more difficult after that. I think Delta is going to have to bite the bullet.
Wayne Rogers: I think Charles is absolutely right. The other problem then, is that Delta, you’ve got to realize, is the second largest short position, right now, that I know of. It’s going to be so volatile. It’s not worth the risk.
Jonathan Hoenig: That’s why people like it. People love these dollar-and-a-half stocks because they can only go to zero. The truth is, Terry, a lot of them do.
Terry Keenan: Would you be a buyer or a seller of this thing?
Jonathan Hoenig: I wouldn’t be a buyer. I learned my lesson with Enron when I bought it around 70 cents and said, ‘how low could it go?’ Well, it went to zero, and Delta could as well. Look at United Airlines (UAL). I’d rather buy Ryan Airlines in Europe, which we don’t own, but it’s a stronger stock. Let the weak stocks be.
Question: "I made money on San Juan Basin (SJT), but was recently stopped out on its downswing. Would you put new money in it now?" – Tom Noelke, Waterloo, IL
Jonathan Hoenig: I think you get stopped out of a stock for a reason. I really wouldn’t reenter the trade. I think if I wanted this sector, I’d buy something like Fiduciary/Claymore MLP Opportunity Fund (FMO) or Kayne Anderson MLP Investment Co (KYN), which are funds that focus on energy plays. We don’t own those.
Terry Keenan: It’s like remarrying your first wife right?
Wayne Rogers: I don’t know about that analogy. I know some guys who went back and married the same woman three times. It can happen, I guess. I think that Jonathan is right. You put in a stop for a reason, if the stop takes you out, good-bye.
Charles Payne: It’s good that they are disciplined enough to put in a stop. If you want to get back in a stock on weakness, put in another stop. Obviously this guy seems to know what he’s doing in terms of discipline, so if you do reenter, just place another stop and see what happens.
Question: "I think I've found a diamond in the rough: Mechel Steel (MTL). It's a Russian steel company. Thoughts?" – Gene Hylton, Roanoke, VA
Wayne Rogers: You know, I kind of like this. It’s trading at about 2.5 times earnings. You’ve got to say, ‘I’ve got to look at this.’ I’m not sure that I’d enter at this price. Maybe at around $26/share. It’s trading higher than that right now. There seems to be a base there and I kind of like that.
Charles Payne: The steel stocks, unfortunately, were a great play a year ago, whether it was in Russia or anyplace else in the world. I would wait for it to pull back as well. I’m a little worried at the way the steel stocks have been acting in the last few months.
Jonathan Hoenig: And I’m worried about Vladimir Putin. I know Bush looked into his eyes and saw his good buddy, but to me he looks like this cold, calculating ex-KGB, which is what he is. I think VimpelCom (VIP), which is a Russian telecom company, is a stronger name, but I’m just not in Russia right now.
Best Bets: Stocks Under $10
A fan favorite. The best stocks for less than $10 bucks a share. Time for the best bets! Wayne, Jonathan and Charles are back with their picks under $10!
Charles' Bargain Buy: Siebel Systems (SEBL)
Friday's Close: $8.34
Charles Payne, Wall Street Strategies: I like Siebel. This was once a hot stock in a customer relationship area; software company. I think they’re going to be more than a one-trick pony. They’re reinventing themselves in what is known as business intelligence. Our clients happen to own this stock. We bought it right around where it’s trading right now. In addition to liking it fundamentally, I think it could eventually be a take-over play at a substantial premium from where it is now.
Jonathan Hoenig, Capitalistpig Asset Management: But the stock is just stuck in one of these old NASDAQ high-flier-like funks, just like so many of these old NASDAQ stocks. As you said, this stock used to be at around $40/share.
Charles Payne: Absolutely, but you know what? It’s gapped up a few times in the last year. It’s showing some signs of life. And it’s a NASDAQ survivor, so that makes it attractive as well.
Jonathan Hoenig: Not for me.
Wayne's Bargain Buy: Partner Communications (PTNR)
Friday's Close: $9.00
Wayne Rogers, Wayne Rogers & Company: I like Partner Communications. It is an Israeli mobile phone stock. I’ve done well in those offshore mobile phone companies like VimpelCom (VIP), which I used to own and some of the others. This is a turnaround. They declared their first dividend. It used to trade around $6/share; it’s now around $9. I like it.
Terry Keenan: Jonathan, you have the terror risk in Israel, of course, but we also have the pullout. Perhaps there is some opportunity. Do you like this one?
Jonathan Hoenig: Amazing pictures from Israel this week. To be honest, the market seemed to like it. I think if you ever looked at Israel as an emerging market, now is a great time to be playing that theme.
Jonathan's Bargain Buy: Companhia Paranaense de Energia (ELP)
Friday's Close: $5.28
Jonathan Hoenig: I’m in Brazil, which has been a little weaker. Companhia Paranaense de Energia is my pick. We’ve talked about it on this show before. This is a Brazilian electricity company. I own a lot of these Latin American utilities. I’ve pared back in the states, but stocks like Empresa Nacional de Electricidad de Chile SA (EOC), Companhia Energetica de Minas Gerais (CIG), CPFL Energia (CPL), we own all of these. There’s been a political scandal in Brazil. They’ve come down, and I think now is the time to take a look at this very promising emerging market.
Terry Keenan: Charles, is it promising to you?
Charles Payne: The stock is a relatively safe stock. It’s definitely cheap in a lot of valuation metrics versus its peers, so I like it in that sense. I don’t think it’s a grand slam, but it looks like a bunt. I’m going for the home run; you’re going for the bunt. That’s ok.
Jonathan Hoenig: ELP used to be a $20 stock. If it’s at $55 now –
Charles Payne: You might hit first base with it, but it’s a safe play.
Wayne Rogers: Jonathan, you’re better off with EOC. I like that much better. I think this is a good one, but like Charles said. It’s ok.
Terry Keenan: Do you own EOC?
Wayne Rogers: I do, yes.
Cashin’ In Challenge
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Mutual Fund Face-Off: “Home” Funds!
Can't buy a second home? No problem! You can still make money in this housing boom in our Face-Off!
Jonas' "Homeless" Fund: Scudder RREEF Real Estate Fund (SRO)
Friday's Close: $16.15
Jonas Max Ferris, MAXfunds.com: Terry, I’ve got ‘reefer madness.’ Scudder RREEF Real Estate Fund is a very good way to mimic the returns of US home prices, if that’s what you want to do, if you think homes are overpriced just like me. But this fund is going to move with home prices. It’s cheap. It trades at a big discount because people are scared that there is a housing bubble. So you’re actually getting a pretty good discount to the REITs that it owns.
Jonathan Hoenig, Capitalistpig Asset Management: And it’s got a good dividend too, Jonas. I knew you’d like this. It’s a real value play, and I think if you’re buying it for income, as part of an income-oriented portfolio, the yield is north of 7 percent. I think it’s an index play on US real estate.
Terry Keenan: A rare moment of agreement between you two.
Jonathan Hoenig: Very rare.
Jonathan's "Homeless" Fund: Alpine International Real Estate (EGLRX)
Minimum Investment: $1,000
Jonathan Hoenig: I think if you’re thinking about real estate, do something different and buy it overseas. My pick is Alpine International Real Estate. It’s got a low minimum investment, and I think you could just make the case much more quickly that international real estate is cheaper than domestic real estate. I also like that fact that if the dollar starts to crumble again, this is going to benefit.
Jonas Max Ferris: I’m not going to return the favor. Here’s my problem: first of all, those economies aren’t growing as fast, largely. And don’t they have the same real estate bubbles that we have, broadly speaking, across many of those countries? And, also, if you’re trying to mimic US home prices with your investment, why Tokyo and Milan?
Jonathan Hoenig: I’m not trying to mimic it. Most people are already exposed to U.S. home prices. This is the point. They want to diversify their real estate exposure into something a little different.
Terry Keenan: And quickly, a problem with both of your picks because you don’t enjoy the leverage that you get if the housing market is going up, right?
Jonas Max Ferris: Well, you can’t buy $400,000 of it with no money down, that’s true. But I think that will work in your favor.
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