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 Kaltbaum, president of Kaltbaum & Associates; and Mike Norman, founder of the Economic Contrarian Update
Could a “Cold War” in Washington heat up your stocks on Wall Street?
President Bush essentially declared war on Democrats taking his first opportunity once they were out of town to make a big time appointment that had been blocked by his enemies in Congress. Democrats weren’t too pleased. If this gets ugly, is this good or bad for stocks?
Tobin: This is great for stocks. The appointment of John Bolton as U.S. ambassador to the United Nations is a small thing. There’s a whole litany of things that are blocked, like asbestos reform and tort reform. It would be good for business to push these things through. This fight between President Bush and the Democrats means that corporate America wins, which will be good for stocks.
Gary K: It’s not just the Democrats forcing the President to abandon his agenda, like Social Security reform, it’s also the Republicans. It doesn’t matter to Democrats what the President says or does because it all will be bad. The good news is that the market could care less. There are so many other things to look at. My biggest concern for the market is the Fed raising interest rates. In the last few days, a lot of interest rate sensitive stocks got torn apart. One of my biggest indicators is how the financial stocks do.
Pat: It’s generally a good thing when there’s a stalemate in Congress because it means they spend less. Spending will be going on no matter what and hopefully they’ll spend a little bit less. I agree with Gary K that this is so far down on the radar screen there’s no need to worry about it. Interest rates are a far bigger worry than the economy. We’re going to get decent growth through the end of the year. If rates really do spike, and the financials get blown apart, that could wreak havoc on the market.
Mike: Let’s put this in perspective. President Bush is seven months into his second term and he’s already had enormous amounts of achievement. He got the Central American Free Trade Agreement (CAFTA) passed. He got the energy bill passed. He got the highway bill passed. Social Security will probably come next year. It’s wrong to say that all the fighting in Congress will be good for the market. In 2001, 2002 and 2003, there were tax cuts and a lot of government spending, which proved to be an enormous stimulus for the market. If we had that kind of agreement and initiative from Congress, we would see the Dow go to 12,000 and then 15,000.
Scott: Bush is being treated like a ‘lame duck’ and I think that’s part of the reason the market has rallied recently, because nothing is getting done – no tax or Social Security reform. When the market does not have to worry about Washington, it’s terrific.
Senate Majority leader Bill Frist said we should increase funding for stem cell research. What stocks could benefit?
Scott: Geron (GERN) is a pure play in embryonic stem cell research, which is where the controversy lies. The company has many patents and proprietary knowledge for stem cell research. Plus, it has a drug that is ready to go into phase one to help spinal chord injuries. (Geron closed on Friday at $9.93.)
Mike: I like this company because it is a pure play. The only trouble is that it is a long way from making any money.
Gary K: There’s too much speculation for me. I don’t like it.
Mike: My pick is Celgene (CELG), which is a company that has been around a long time. It’s a biopharmaceuticals company that helps treat cancers by working at the cellular and genome level. It pioneered the extraction of stem cells from placental tissue. (Celgene closed on Friday at $47.51.)
Scott: This is a good company and derives a lot of revenue from its thalidomide drug and Ritalin, which are active drugs out there.
Gary K: I do like that it has great earnings and revenue growth.
Brenda did counteract with the argument that Celgene does sell a form of a thalidomide drug, which is highly regulated because of its historical link to birth defects, and tight regulation puts a cap on profits and sales.
Gary K: I like Genzyme (GENZ), a company with a lot of substance. It focuses on rare genetic disorders, renal disease, kidney disease and more. It has great earnings and great revenue growth. The stock has been acting very well with a good run up. It is in a great spot for stem cell discovery going forward. (Genzyme closed on Friday at $71.75.)
Scott: This is a great company, but it’s very large with an $18 billion market cap. It’s out the door for a pure play on stem cells.
Mike: Genzyme is a good company, but a bit pricey.
Funds vs. Stocks
Pat likes mutual funds. Toby hates them and says to go with stocks or go home. Which is best for you?
Pat: The first fund I really like is Muhlenkamp (MUHLX), which tends to concentrate about 25 percent of assets on a particular sector. According to the most recent filing, the manager is heavy into financial services right now. The fund has a 15 percent average annual return over the past 15 years, so we know it has delivered the goods. If you’re able to withstand a little volatility, it’s worth it. The minimum investment is $1,500.
Tobin: I don’t like mutual funds because I don’t know anyone who got rich in funds. I know thousands of people who got rich in stocks. I would rather buy financial services like ICICI Bank (IBN), which is an Indian financial holding company. The transformation of India is just starting. India is the new China. (ICICI Bank closed on Friday at $23.75.)
Pat: The problem is this has had a lot of bad loans. This is going to be cut in half in the next two years. Playing with fire on this one.
Pat: I also like Mairs & Power Growth (MPGFX), which is a very high quality growth fund based in Minnesota. Rigth now it has very blue chip holding with names like Target (T), Johnson & Johnson (JNJ), and Medtronic (MDT), which are good core holdings. It has a 16 percent average annual return in 15 years. The minimum investment is $2,500.
Tobin: The problem with Mairs & Power Growth is the fact that it doesn’t own any energy stocks. How can it be a growth fund, but not own energy? I like TODCO (THE) instead, which is the most undervalued energy services company out there. Despite what Pat has said over the past 3 years, I have been right on energy. This one is undervalued based on its cash flow and it’s going to explode next year. (TODCO closed on Friday at $31.19.)
Pat: My next pick is the Oakmark Select Fund (OAKLX), which owns a lot of larger cap value stocks. It has reasonable expenses and very high quality research. The fund had a tough year in 2004, but is ready to bounce back. Plus, it has a 19 percent average annual return over the past 9 years. The minimum investment is $1,000. I own this fund.
Tobin: This fund has a huge position in Washington Mutual (WM). Why don’t you just own that stock? Interest rates are also going up. I would rather own Inco (N), which has been a value company this year and is set to be a growth company next year. This is also a big play on nickel. Nickel is going up in price because of a decrease in production. Demand is huge because hybrid cars use nickel batteries. (Inco closed on Friday at $41.08.)
Gary K’s prediction: Housing stocks start to fall; home prices soon follow
Mike’s prediction: Dow down 10 percent by end of year due to rising rates
Scott’s prediction: Harry’s hot! Scholastic (SCHL) gets bought for 40 percent premium
Tobin’s prediction: Northeast Utilities (NU) is another takeover; going up 40 percent
Pat’s prediction: Tempur-Pedic (TPX) is no sleeper! Up 30 percent in 1 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"; Ben Stein, author of "Yes, You Can Be a Successful Income Investor"; Adam Lashinsky, senior writer at Fortune Magazine; Meredith Whitney, executive director at CIBC World Markets; Herman Cain, author of "They Think You’re Stupid"; Joe Battipaglia, CIO at Ryan Beck & Co.
Neil Cavuto: Will America and its economy soon be taking a back seat to China? Jim, we keep hearing that China is going to eat our lunch in the coming years. Will they?
Jim Rogers: They’re not going to be larger than us on a per capita basis anytime soon. We should all grow together.
Neil Cavuto: Do you get the impression that China is firing on all cylinders?
Jim Rogers: Yes, this is a boom in China like I’ve never seen before. Shanghai is a whole new city in the past six years. They call themselves Communists, but they are the biggest capitalists in the world. But they’re slowing down. They’re trying to pop a real estate bubble.
Neil Cavuto: This is a country we have not trusted for many years. A lot of their companies that have tried to buy our companies have backed off saying we’re anti-China.
Joe Battipaglia: They’re now the new global player that we need to do business with. But they have some problems. They built up a huge treasury reserve, but they have a huge infrastructure requirement in the country. And they are responsible for about a third of global GDP growth. If there are any disruptions there, it could have a repercussion on global economies in terms of growth.
Meredith Whitney: Our GDP was at $11.6 trillion; theirs is $1.6 trillion. They drive commodity prices up, and we feel the brunt of that.
Ben Stein: China has roughly five times the population and has a very small fraction of our per capita GDP. As Jim said, let’s all grow rich together. As they grow rich, we grow rich too. I wrote about this in last Sunday’s New York Times and got an avalanche of responses from the Chinese. They say we want to be your friends, and let’s grow rich together.
Herman Cain: I don’t think economically we have to really worry about them. But military, that’s a different issue. The concern is their connection with Russia right now. It’s a lot easier to become a military threat than a competitive threat.
Ben Stein: They’re not really a military threat to us. They might be a bigger military threat to Taiwan.
Neil Cavuto: But Ben, if they attack Taiwan then we would be directly affected.
Ben Stein: There’s no sign that they’re going to attack Taiwan. And they’re a very small military power compared to the United States.
Adam Lashinsky: I want to make a comparison here to put things in perspective. Ben’s right when he says China isn’t going to get bigger than the United States anytime soon. But that’s beside the point. China is like a technology stock right now. It’s smaller than the rest of the stocks, but it’s got all the momentum. It’s going to continue to get very big for the next 20 years. So we can’t just pretend that China doesn’t matter. And I know Ben, that’s not really what you’re saying.
Ben Stein: I’m not saying it doesn’t matter, but who cares if China gets richer than us. We’re still very rich ourselves.
Jim Rogers: Especially if we’re getting richer too. I mean who cares if they’re getting rich.
Meredith Whitney: I care because I have standards when it comes to my friends. China has amazing copyright infringement – they steal our intellectual property. They also have a long record of human rights abuses.
Adam Lashinsky: Meredith is making a good point, and that is that we need to push back. We need to make sure that they play by the rules. And we need to play by the rules too. Our behavior in the CNOOC situation was shameful to step in there and say they can’t buy Asian oil assets from Unocal.
Ben Stein: And they’re human rights situation has improved incredibly.
Joe Battipaglia: And just to bring in some history, after WWI Germany was not on the radar screen as a power and look how quickly they surprised everybody.
Herman Cain: And that’s what I’m saying. We need to keep one eye open relative to the whole military thing.
More for Your Money
Neil Cavuto: The stocks that could help keep America on top and also get you more for your money. Joe, to you first.
Joe Battipaglia: I like St. Joe’s Company (JOE) for the long-term real estate development in the state of Florida. The 800,000 acres that are going into development over the next 20-30 years are a way to make money. (Joe’s firm owns shares of St. Joe’s Company.)
Jim Rogers: Joe, the question was which companies are going to help us compete with China. How is real estate going to help?
Joe Battipaglia: Real estate development in the U.S. is definitely going to help us compete with China. That’s where wealth is created and has been for the last 50 years and will be for the next 50 years.
Ben Stein: I like iShares MSCI Emerging Markets (EEM). We should get in on the winning side of these emerging markets, low cost of labor and very high amount of capital pouring into companies. (Ben owns shares if EEM.)
Jim Rogers: That stock is up a lot. Emerging markets have been the flavor of the year for the last couple of years.
Ben Stein: I’m not saying for the short-term. I’m saying for the next 10 years. It might have some downside for the next 6 months.
Adam Lashinsky: Every investor has to have some emerging markets in their portfolio. If you want to be in a company that makes America strong while benefiting from the rest of the world, Caterpillar (CAT) is the one. It has 20 percent revenue growth. It’s doing great in China and doing even better in Latin America.
Joe Battipaglia: One thing that concerns me is their margins are flush right now.
Jim Rogers: I would suggest you buy cotton. They import cotton and we export cotton. Why don’t we be patriotic and buy cotton? It’ll help jack up the price and we’ll all make money.
Ben Stein: How do you buy cotton? My broker at Merrill Lynch said he can’t buy it for me.
Jim Rogers: Merrill Lynch got out of cotton trading a while ago, but most other brokers can buy it for you.
Head to Head
Neil Cavuto: Rafael Palmeiro may have sounded credible a few months ago when he denied using steroids. Now he sounds like a liar when he says: "I didn't know.” It's a defense that is now all too popular. Herman, "I didn't know"… we've heard a number of CEO's use that as a defense. Now athletes are getting in on the act. Does it send a bad message?
Herman Cain: “I don’t know” is a lame excuse for integrity and the truth. Savvy investors aren’t going to be turned off totally on the markets. They would be turned off by any particular business that they’ve invested in. The instances we see now do cause people to become leery. But I don’t think we have an epidemic on how it would affect the market.
Jim Rogers: You’re right. We don’t have an epidemic. But Herman, this has been going on throughout history. If you’re the CEO of a company, who’s fault is it? It’s not my fault that there was phony accounting. The CEO should be in charge and if you didn’t know, then you shouldn’t be the CEO.
Herman Cain: I agree. The buck stops with the CEO.
Neil Cavuto: But can you blame the CEO for let’s say what was going on at Wal-Mart — lawsuits charging racial discrimination and that sort of thing. And you have these stores all over the world. Can you be held accountable for the behavior of a few errant managers?
Jim Rogers: How do you know it’s only a few errant managers? And if it is only a few errant managers, why didn’t the CEO know about it?
Neil Cavuto: So you’re saying no matter how low it goes, you’re the big cheese, it’s your responsibility.
Jim Rogers: If the guard at the store robs something, then of course that’s not your fault. But you said it’s several instances, several managers, doing improper things. Somebody has to know that, and if they don’t they should be gone.
Herman Cain: In a large organization you know you’re going to have a few bad apples. And you may not always be able to catch those bad apples.
Neil Cavuto: Yes, but when you had your pizza kingdom Herman and became a ga-zillionaire, did you know all of your people were on the up and up? And was there a delay before you found out?
Herman Cain: Absolutely. We had to fire several restaurant managers for stealing money. There was a delay when we found out. The longest delay was about a month. But as soon as we found out we moved immediately. And that sent a message that we will not tolerate that sort of behavior.
Jim Rogers: Neil, it didn’t cripple the company. He found them within a month. At WorldCom it crippled the company. And those guys said, well I didn’t know. If it’s that long, and it crippled the company, and the CEO didn’t know, something is very wrong.
FOX on the Spots
Ben: More defense spending; Boeing (BA) will benefit. (Ben owns shares in Boeing.)
Jim: Unocal block creates economic tension worldwide.
Herman: National Sales Tax sweeps the nation!
Meredith: Retail sales heat up when temps cool down.
Joe: New gains for old tech; look for 20 percent profits!
Neil Cavuto: The Chinese and the Russians together equals war games. Two weeks, 100,000 men. This seems like a little more than games to me. Let's just say watch them... closely.
Bulls & Bears | Cavuto on Business | Forbes on FOX | Cashin' In
Forbes on FOX
Flipside: America's Bad Image Overseas Is Good for Stocks and Safety!
Jim Michaels, editorial vice president: It goes with the territory. When you are rich and powerful people resent you. When the British ruled the waves in the early 20th century, there was British colonialism and all this other stuff. History now judges the British Empire very kindly. Let's let history judge and not worry about the poll numbers of today.
Quentin Hardy, Silicon Valley bureau chief: I think the proposition right now is the more they are afraid of us the safer we are. That's not the way to win against terrorism, by making them more scared. Look at the guys who attacked the twin towers and London. They were young, westernized men and they still committed suicide. I really don't know what kind of level of terror we could have given them to stop them. This idea is a non-starter.
Steve Forbes, editor-in-chief: The idea that you are going to scare your opponents is preposterous. What you want to do is get rid of your opponents. We're unpopular because we are envied and because we are number one. The bottom line is that it is better to be safe and secure than to be loved. When you are number one you have to make tough decisions that are going to go against you sometimes. If Germany or France get into trouble who are they going to turn to? They are going to turn to the United States.
Victoria Murphy, staff writer: It often pays to play nice. We are entering a century where American might not be the dominant superpower. We're competing increasingly with China. They are beating us now in population and will increasingly be an economic power and have an increasing influence in the world. We need to play nice now or we're going to regret it later.
Mike Ozanian, senior editor: When it comes to national defense you have to do everything you can to protect your country first and not worry about what other people think. The fact of the matter is, we haven't been attacked since 9/11. We've been winning the war on terror. So the Bush administration has been doing the right thing.
John Rutledge, Forbes contributor: I don't care what the foreigners think. If you are doing the right thing you don't want others changing your policies one way or the other. In particular, I'm more interested in our views from the Asians than I am from Europe. Asia is where we're investing all of our money. We have to protect our investments and we need to grow there.
David Asman, host: There was a survey that was just done that suggested that U.S. brand qualities are not doing so well overseas.
Quentin Hardy: Ignore the short-term surveys but do think about history a little bit. We won against the Soviet Union because we are the "Pepsi Challenge" country. We are open, we believe in market and we believe in the exchange of ideas. You guys are talking about fear, putting up barriers and a strong defense. That is not how we are going to win this.
John Rutledge: Well the Levis and the Coca-Colas were great in Russia but we won that one because we destroyed Russia's income by killing commodity prices. That was actually part of the Reagan economic plan to undermine the Soviet Union's revenue base.
Jim Michaels: I don't think that American brand quality is being put in jeopardy at all. Most American companies working abroad have taken on local coloration anyhow. People shop at Wal-Mart because they have great prices, not because they salute the American flag. I don't think it's going to hurt our trade.
Steve Forbes: Being nice doesn't mean that you have to be weak. We have to make tough decisions fighting terror wherever we find it.
Victoria Murphy: We do need help from other countries in the War on Terror. We need cooperation. We need other country's intelligence. This isn't one country that we can point our guns at. This is a web of terrorists.
Mike Ozanian: I don't really care if they stop buying our brands, as long as they are still buying our treasury bonds. They've been helping finance this recovery.
Quentin Hardy: We're acting like perceptions don't matter. The truth is we went into Iraq with bad information about weapons of mass destruction, ignoring the UN until the last minute and then we're saying that we're saving the UN. That was a really bad idea.
Jim Michaels: The reason that the Middle East is not helping in Iraq is because they don't have the military power to do it with and they are afraid of their own Muslim powers at home. Whether they love us or not, they are not going to help us in Iraq.
Mike Ozanian: The same people that don't like us are the same people who were trading oil-for-food with Saddam.
Quentin Hardy: You seem to think that our activities in Iraq aren't affecting the international terrorist landscape? There have been far more terrorist attacks since we've gone in there than before.
Steve Forbes: They are attacking us in Iraq because they know that they can only win in Iraq by effecting public opinion at home like they did in Vietnam.
In Focus: Should All Americans Get Free Health Care?
David Asman: About 100 million Americans already receive health care coverage from the government via Medicare, Medicaid, the military and government employers. That's one in three Americans and its costing taxpayers $864 dollars. Should we go all the way and give everyone a National Health Care Plan?
Quentin Hardy: Yes. The fact of the matter is, health care is better done on a national basis. In an era where the private sector had more power than ever before it couldn't provide health care for everyone. But let's not take a backward way into national health care like Medicare. Let's think about a sensible way from the start that focuses more on prevention and cheaper ways to do it.
Steve Forbes: Another national bureaucracy is not going to solve our health care ills. All you get with nationalized healthcare is shortages, rationing and stagnation in terms of innovation. We see that all over the world. Do we want that here? We don't have real private sector health care yet because it's all through a third party. The consumer is not in charge.
Victoria Murphy: Let's look at Canada who has a national health care system. The average Canadian waits 18 weeks to get surgery. Often they come south to our hospitals to get procedures done. They can do it more quickly and many times the technology is better. A national health care system is not the answer.
Mike Maiello, Staff Writer: I think our economy is big enough that we can do anything that we put our attention to. Right now we have 15 percent of adults and 12 percent of children with no kind of health care at all. It's 2005 and we're a rich country. It's morally wrong that this exists. Plus this is a heavily subsidized industry. Taxpayers are paying for innovation.
Jim Michaels: That doesn't make socialized medicine any more palatable. In spite of all of this moaning, we have the best health care system in the world. If you think that socialized medicine is the way to go, then go to Buffalo, Detroit or Cleveland and see all the Canadian license plates parked outside of medical centers.
Quentin Hardy: 100 million are already covered by the government and there are some people that aren't covered at all. Let's face the facts. It's here. Health care didn't work in the private sector. We have this government system. Now let's design it right and not pretend that is doesn't exist.
Steve Forbes: We haven't had a real private sector. It's all third party. There is no incentive for consumers to get the best deal possible. Health savings accounts give consumers some control of some of the dollars and guess what? They get more value for those dollars.
Mike Maiello: Those health care savings accounts just transfer costs to individuals. I think people are already complaining that they pay too much for health care if they are lucky enough to have it. If they don't have it, then they are complaining that they can't afford it.
Steve Forbes: One reason they can't afford it is because of all of these mandates that politicians put in. A free market works. Take laser surgery for eyes for example. It costs one third of what it did 10 years ago because health insurance does not cover it, so the private sector is allowed to work. We can do that for the rest of health care.
Victoria Murphy: We want a more direct relationship between the patient and the doctor. When the patient pays, they make different decisions that are often better ones and more preventative. That's the direction we want to go in. We should do it in the form of some kind of health care vouchers for people who can't afford it instead of this bureaucracy.
The Informer: Old Stocks v$ New Stocks
Victoria Murphy: Don't buy old stuff. Airlines and automakers are bogged down with legacy costs. Buy new guys like Yahoo (YHOO). I like it because on-line advertising is booming and Yahoo has positioned itself very well to benefit from that.
Mike Ozanian: Victoria wants you to think that Yahoo is worth $50 billion even though it only does $4 billion in sales. It's too expensive for me.
Victoria Murphy: Yeah, it's pricey but you could have said that a year ago and missed out. Also, I think it's still growing.
John Rutledge: I like the old stuff. I'm in love with dividends that older companies provide. I like iShares DJ Select Dividend Index (DVY). It owns 100 dividend paying stocks. Dividend growth will be 60 percent of total returns in the next 10 years across the stock market.
Victoria Murphy: Dividends are nice but they are a little bit boring. Microsoft just recently started giving shareholders dividends. If you had waited for that moment you would have missed out on something like a 36,000 percent return.
Nicole Ridgway, senior reporter: I'm with Victoria on the new economy stocks. Broadband is finally living up to its promises. I like McAfee (MFE). It's the second largest security software maker.
David Asman: But the stock has tripled in the past couple of years. Is it too high right now?
Nicole Ridgway: I don't think it's too high. They are going to sign a couple of deals with mobile customers and that will generate more revenue and profit.
Mike Ozanian: I like the new economy stock that helps old economy stocks. I like CARBO Ceramics (CRR). It makes products that help oil companies get oil out of the ground.
Nicole Ridgway: There is a lot of demand for that but I think that the stock price is really high. Especially compared to its peers.
Mike Ozanian: The stock has doubled and is not for ‘fraidy cats.
Makers & Breakers
• Harley-Davidson (HDI)
Jack Steiman, president, InvestedCentral.com: MAKER
Harley-Davidson's July earnings report was great. It had a problem in April and got through that. Also, it has gotten into the finance aspect of its business. Something it has never done before. That will raise earnings. It also announced a 17.7 million share buy back last quarter.
David Asman: You've got a 12-month target price of $67. (Friday's close: $51.41)
Jim Michaels: BREAKER
Harley-Davidson motorcycle prices are too expensive. I wouldn't buy it.
John Rutledge: MAKER
I'm a maker because nobody buys this stock for the motorcycles. You buy it for the t-shirts and the leather jackets. This is a hot brand. When the economy grows strongly brand equity in these kind of brands increases.
• KLA-Tencor (KLAC)
Jack Steiman: MAKER
Semiconductors lead the economy and I believe there is going to be a good economy in 2006. It just reported great earnings for July and upped its financial guidance in Japan. Also, it just paid a dividend for the first time.
David Asman: You think it can go to $65 with 12 months. (Friday's close: $50.36)
John Rutledge: BREAKER
I'm uncomfortable making bets on things driven by commodity prices even though equipment demand from Asia is very strong right now.
Jim Michaels: MAKER
I think tech stocks look good and this company is right in the heart of the tech business.
Bulls & Bears | Cavuto on Business | Forbes on Fox | Cashin' In
Stock Smarts: What Housing Bubble?
Is talk of a housing bubble just nonsense? Even with long-term mortgage rates on the rise, home buying continues to surge. June sales for both existing and new homes were up, and the price for a new home is up 14.7 percent from last year.
So what is it: bubble or no bubble?
Kendra Todd, MyHouseRe.com: Absolutely no bubble. A bubble implies that we are going to have some sort of nationwide correction in the real estate market. That’s simply not going to happen - not over the next year or two. There are some markets that are becoming less affordable to the masses. Those are markets to keep your eye on and probably stay out of investing. But then there are areas like Florida where we’re not seeing a slowdown. People keep coming in and all the factors like supply and demand are right.
Dagen McDowell: Jonas, do you buy that?
Jonas Max Ferris, MAXfunds.com: I don’t buy that. Forget all these obvious signs like all these crazy mortgage derivatives that make the futures market look simple. The price of a home is now something like four times what the average person makes. That has never happened in history. That is a huge valuation multiple. It has to be the top.
Dagen McDowell: Wayne, you’re our resident real estate expert. Bubble or no bubble?
Wayne Rogers, Wayne Rogers & Company: Well, yes in certain places. Kendra, you’re wrong. I could name a city in Florida where there are 200 condos a month coming on the market at an absorption rate of 25. So sooner or later, that has to stop. You’re going to see the absorption rate go south and you’re eventually going to see prices adjust themselves. It’s going on in regional places. Remember, real estate is not national. It is a regional phenomenon. It’s going to be terrible in some places and in other places you’re going to see it continue this strong. But there is a bubble.
Jonathan Hoenig, Capitalistpig Asset Management: But Wayne, what about Ma and Pa Kettle who own and live in their own home? For them, there is no bubble. Kendra, I think you’re absolutely right. I don’t see this nationwide correction in real estate. In fact, real estate is strong. We’re buying some of the closed-end funds like ING Clarion Global Real Estate Income Fund (IGR) and Cohen & Steers Global Income Realty Fund (RWF) that actually own international real estate. So I’m playing it that way, but I just don’t see a bubble. The fear is that these people have leveraged themselves to the hilt to own interest-only mortgages and are paying with 3 percent down. They’re going to get hurt. But you know what? They’d going to get hurt whether it was tech stocks or Beanie Babies or anything else.
Wayne Rogers: But Jonathan, we’re talking about housing. We’re not talking about Beanie stocks.
Michael Parness, Trendfund.com: I don’t think the question is whether or not there is a bubble; there is a bubble. It’s just a matter of when it’s going to pop. Practically every week, I get a call from a friend of mine or someone who says, ‘hey, do you want to get in on this investment?’ I say, ‘What is it?’ Of course, it’s real estate. Historically, when everybody — like people with no qualifications — invest in something, it’s a bubble. It’s just a matter of when it’s going to pop.
Charles Payne, Wall Street Strategies: You know — the interesting thing is that when we talk about it popping, I think everyone is afraid because the tech market popped. I think with real estate, we know that it’s ‘plateauing’. We also know that some of the variables like interest rates are going to go higher than we thought they would just a couple of weeks ago. With regards to the homes on the market, supply is getting outrageous. Also, the average home price has ‘plateaued’. Does it pop, or does the air seep out slowly? That really is the question here, not whether or not it’s at a top, because, clearly it’s near a top or at a top.
Jonathan Hoenig: Charles, you’re absolutely right on the interest rates. I got spanked this week with my utilities and interest rates going up. They’ve hit the REIT’s as well over the last couple of weeks with higher interest rates, so that’s the big ‘if’ here, and I think you’re right. That’s what real estate investors should be watching. Interest rates.
Dagen McDowell: Kendra, there have been anecdotes coming out of Florida that there is less flipping and less speculation down there. Do you see that?
Kendra Todd: Absolutely. There are certain markets, like Miami for example, where you just have this international influx of buyers. Yes, some of them are investors, but the fact of the matter is that even the flippers are able to find the end buyers at this point to meet their needs and sell their properties. So that’s not something that I see as a concern in the Florida market.
Charles Payne: That’s called the ‘greater fool theory,’ and it does work to a certain extent, but there is a point where you do run out of people to flip it to. And I think anyone, not even being an expert on finance or real estate, just knows that you’ve got to have a kind of gut feeling that we’re near a top. And the big question is whether or not there will be a collapse. I think that Alan Greenspan has a big dilemma on his hands. He’s tried to make these little baby steps. He’s raised rates so much, but you know it might be better at this point if he were to raise it 50 basis points and say ‘it’s over.’ I think that would help the housing market more than anything else.
Wayne Rogers: Well, I think Charles is absolutely right. The bubble, to the extent that there is a bubble, is an individual and a regional phenomenon. It’s not a national phenomenon yet. You have to watch, as I just said, the absorption rate is the first thing that goes, and then prices correct themselves, and then we may ultimately have some foreclosures.
Dagen McDowell: But Jonas, nationally we have never seen real estate prices fall in a year going back at least to 1970.
Jonas Max Ferris: Adjusting for inflation we haven’t. I’m with Mike. I say it’s a matter of when. And getting to Wayne’s national point, nationally prices just went up by double-digits in the last year. That has never happened, adjusting for inflation, in the history of the housing market. Houses don’t go up double-digits every year. It’s an asset class that doesn’t do that, and if you believe in reversion of the mean, it’s got to come down.
Jonathan Hoenig: Mike, don’t worry. Jonas has been saying the same thing for about 3 years in a row. You’ve been talking about a bubble in real estate since this show has been on the air.
Jonas Max Ferris: That is not true.
Michael Parness: I’m not in the habit of picking tops. Historically, in the market, the trend is that if you start playing the Toll Brothers’ (TOL) and these kinds of real estate stocks, through the last quarter, those stocks should rise because they’re up going into the last quarter. I wouldn’t advocate to start dumping your real estate stock or dumping your real estate investments. I’m not into picking tops, but I think that the idea that there is not a bubble is kind of ludicrous.
Charles Payne: And to further your point and what Jonathan is saying, people have lost a lot of money betting against real estate, and that’s one thing I’m not advocating right now.
Kendra Todd: We’ve been sitting here talking about whether or not there ‘is a bubble and, if so, when is it going to burst?’ for the last year or year and a half instead of focusing on how we can capitalize on this great real estate market. I get tired of talking about whether or not there is a bubble. Let’s talk about how we can actually maximize our investment potential by using real estate as a vehicle. I’ve seen a lot of great wealth built and lost in the stock market. Real estate is not volatile like the stock market. Yes, flippers are going to get hurt in all different kinds of investment markets, but if you can stand the test of time in real estate, it’s slow and methodical and I have seen a lot of great wealth built and held in real estate.
Dagen McDowell: Wayne, everybody needs a place to live, right?
Wayne Rogers: Well yes, but you don’t say that you can’t go broke in real estate. Look at what’s happened to Donald Trump. He’s declared bankruptcy a couple of times and lent his name to everything. You can go broke in real estate. Listen, you can also make a lot of money in it, but you’ve got to be very careful. It’s a regional and a local business and you must choose your properties carefully. And if you choose them for income purposes, that may be fine. You could go out and buy a 20-year lease at a 7-8 percent yield and that might be wonderful for you. It’s different from housing. So there are all kinds of real estate out there. Don’t just condemn it all, but at the same time, you must look at it carefully.
Jonathan Hoenig: I think it is size that kills. No one knows the future, but I think the people who got hurt at the top of tech were those who had their last cent pledged to tech. I think the same thing in real estate. I wouldn’t bet against it; I think the panel seems to agree on that. But I think those who have leveraged themselves to the hilt with the interest-only deal are going to get creamed. But they always do.
Question: "I'm a recent college grad. I want to buy a house in a year and a half and plan to save $600 a month. How can I make the money grow?"
Wayne Rogers: In a year and a half, at $600 a month, that’s $10,800 that she is going to have to put away during that period of time. I would suggest that she take most of that money and put it in one of Jonathan’s floating-rate funds. She wants to save the money. That’s the first thing, and she wants to get a return on it. I would put the rest of it in one of those Master Limited partnerships where she’s going to earn 7-8 percent.
Jonathan Hoenig: Wayne, put it in the bank. She’s got a need for this money. She wants to buy a house in a year and a half. The bank is the only place for this money.
Wayne Rogers: But what about your floating-rate fund, if it’s not a bank fund?
Jonathan Hoenig: It’s a lot more volatile than a savings account. She wants to buy a house; she’s got a specific need for the money. Put it in the bank, put it in a money market account and let it be.
Wayne Rogers: Do you think interest rates are going north or south?
Jonathan Hoenig: I think they’re going north. I like the floating rate funds, but I also think that when you have a specific need for the money and there’s a goal in mind, you can’t take any risk. Especially 18 months out.
Wayne Rogers: I don’t think it’s a big risk.
Dagen McDowell: And Charles, if you look really hard, you can get 3 ½ percent in a money market account.
Charles Payne: You can. I agree with Jonathan about the money market account, because this woman has a certain time parameter. But what I would say is that she might be a little unrealistic. And that is a big problem with a lot of investors who are out there watching this show today. They’re unrealistic about what they want in the time period that they want it. That’s what you have to adjust. If she’s going to stick to these strict standards, I think the bank or money market is the best place to go.
Question: "Is now a good time to buy Anheuser-Busch (BUD), or should I just buy it to drink it?"
Charles Payne: I don’t like the beer or the company. It’s not necessarily the company per se, but beer is as flat as day-old beer, if you’ll excuse the pun. The baby boomers are buying wine; they’re buying other things, as they’re more health conscience. I like Constellation Brands (STZ). They do hard liquor, they do wine, they even have imported beer, but I’m afraid of all beer stocks. Particularly Budweiser. We don’t own it. Our clients own Constellation Brands, but not Budweiser.
Jonathan Hoenig: What about Warren Buffett?
Charles Payne: Warren Buffett put a floor under the stock and that’s great for people who want to hold it and sort of ride its coattails, but one thing about Warren Buffett is that he can look out 10 years and be right. Most people watching this show can’t afford that.
Wayne Rogers: I think Charles is absolutely right. The beer market is a tough market right now. It’s highly competitive. You’ve got a lot of little microbreweries that are picking away at the edges of it. And it’s all about market share and advertising. That’s just a tough way to go. I’m with Charles on this one.
Question: "What does the crew think of Best Buy (BBY)?"
Jonathan Hoenig: I know it’s been strong and you’d think I’d like it, but the stock just split. I have to think that you’re chasing it here right now. I think if I had to buy a retailer, I would probably go for it’s opposite — Circuit City (CC). We don’t own it, but I’d feel better about buying it instead of chasing Best Buy here.
Dagen McDowell: Charles, you like this one?
Charles Payne: Yeah, I like Best Buy. Ironically, we played Circuit City recently and there’s a little one called Tweeter. But I like Best Buy because it’s aptly named. It is the best company in the industry. Circuit City is a play only because it’s an also-ran. It hasn’t performed and it may be acquired. But as far as Best Buy is concerned, Jonathan is right. Occasionally the stock gets expensive, but if you’re going to buy and hold anything in this industry, it’s going to be this one.
Dagen McDowell: Wayne, any worries that high gas prices will hurt Best Buy?
Wayne Rogers: No, but I’m with Jonathan on this one. It’s been a terrific company, it’s had a terrific run, but I don’t know whether this is the entry point or not. I think it’s a little expensive at this level.
Question: "I'm looking for some guidelines for setting up effective stop-loss orders. Any suggestions?"
Wayne Rogers: The general rule is 8-10 percent under your entry point, but that depends a lot on where stock has been accumulating. You have to look at a chart and see what the volume has been at certain entry points and at certain levels. And you always want to put your stop in just below that level.
Jonathan Hoenig: You have to have a stop; that’s what’s important. You could have bought Enron and whether you had used a 15 percent stop, an 8 percent stop, if you had sold it at the 200-day moving average, you have to have a sell discipline with every investment you make.
Charles Payne: I think you have to understand the nature of the stock too. You could get easily stopped out of a stock that’s very volatile, and a week later it’s higher, so if you’re buying a highly volatile stock, you need a big, wide stop-loss. If you’re buying a real non-high beta stock, then you need a tighter stop-loss.
Cashin’ In Challenge
Check out their stats at: www.foxnews.com/challenge
Best Bets: “Fat” Stocks
Atkins going bankrupt. Low-carb, high protein going the way of the dinosaur. Which stocks will benefit?
Wayne's Fat Stock: Sonic (SONC)
Friday's Close: $30.87
Wayne Rogers: I like Sonic (SONC). I own it. Its earnings were up this last year 16 percent per share. Same-store sales were up 6 percent. They have a repurchase program going on right now. I don’t know whether the entry point is right here or maybe a point below this. But I think for a long-term pull it’s a terrific company.
Dagen McDowell: Jonathan, you used to like this one a long time ago. What about now?
Jonathan Hoenig: I love the Sonic cheeseburger. If you take the bun off, Dr. Atkins would approve! Wayne, I just don’t think it’s there — Darden (DRI) I think is stronger in the restaurant group. Checkers (CHKR), even Steak n’ Shake (SNS). I kind of danced with this girl before. I think I have to pass.
Jonathan's Fat Stock: Tootsie Roll Industries (TR)
Friday's Close: $31.26
Jonathan Hoenig: I like the candy company Tootsie Roll. Dr. Atkins would never let you enjoy the Tootsie Roll treats that they make. This is a value stock here. But, you know, a lot of the sugar companies - Wrigley (WWY), Hershey’s (HSY) are performing. We don’t own this now, it’s on my radar screen as a value pick that’s trading at a price much lower than it was in 2000, unlike a lot of stocks right now.
Wayne Rogers: You mentioned Hershey. Hershey is a better company. I like that one better.
Jonathan Hoenig: It’s been a stronger stock.
Dagen McDowell: Charles, Tootsie has a great long-term record and long-term returns. What do you think?
Charles Payne, Wall Street Strategies: Yeah, but it doesn’t have a great long-term chart, which makes it surprising that Jonathan is going with this one. Also, it’s perceived as sort of a one-trick pony. I think you mentioned others. Hershey’s I like a lot better, and Wrigley’s I like a lot better.
Jonathan Hoenig: Charles, when you say one-trick are you talking about the Junior Mints or the Sugar Babies?
Charles' Fat Stock: Starbucks (SBUX)
Friday's Close: $50.54
Charles Payne: You know, Starbucks is one of these companies where people who are on diets and people who are supposedly health conscious, they go in there, they load up and they come out, and they don’t feel guilty. And that’s probably the worst move they make every day. Tremendous company, tremendous management, global footprint, growing in China, some growing pains in Japan, but looks great.
Dagen McDowell: But Michael, the stock has no buzz this year. What do you think?
Michael Parness, Trendfund.com: You know, I don’t know where they’re going to put more unless they start putting them in people’s houses. Where’s their growth coming from? Or the other thing is maybe what they want to do is, maybe professional athletes start using mocha frappuccinos instead of steroids.
Mike's Fat Stock: Wendy's International (WEN)
Friday's Close: $49.45
Michael Parness: Wendy’s is a story stock, and they story isn’t about whether or not you’re going to start eating somebody else’s finger. The story is that the Tim Hortons franchise that they own and that they announced last week that they’re going to be spinning off. Tapping rapid growth, it’s coming into the United States, doing well here. And I think that as we move closer to that IPO the stock should take off.
Dagen McDowell: Wayne, their core business sales are down. What do you think?
Wayne Rogers: I disagree, but not that the sales are not down. They have a repurchase program going on as well. They’re going to spin out Tim Hortons. They’ve just done a reorganization. They’re paying down debt. I think in the long run, again, Wendy’s is a much stronger stock. Listen, Dave Thomas was a good friend of mine, and when he was around it was a great company and it went through a period now. I think it’s coming back to be a great company.
Face-Off: Power Funds
Feel that charge in the air? We’ve got picks that power up on energy for our face-off.
Jonas Says: Energy Select Sector SPDR (XLE)
Friday's Close: $48.43
Jonas Max Ferris: Energy SPDR (XLE) is the cheapest way to get a diversified energy investment going. You’re basically buying a basket of all the giant energy companies for a very low expense ratio, which means you’re going to get all the dividends that these stocks are paying out, cheaply.
Jonathan Hoenig: But Jonas, doesn’t everyone already own these stocks? You know how many portfolios I’ve seen that have Exxon Mobil (XOM) and British Petroleum (BP) and ConocoPhillips (COP) in their top three holdings? Well I know it’s been a strong performer — I think it’s a market performer, but I just think the story’s out on big oil stocks. Wouldn’t fight them, but I think the run might be over for XLE.
Jonathan Says: Fiduciary/Claymore MLP Opportunity Fund (FMO)
Friday's Close: $21.21
Jonathan Hoenig: Well I’m looking a little bit more off the radar screen. My pick is ticker symbol FMO, which is Fiduciary/Claymore MLP - that’s Master Limited Partnership - Opportunity Fund. This is a closed end fund, it’s trading at a 3 percent discount to its net asset value. 6 percent dividend yield - Jonas a bit more than your fund, even you’d admit.
Jonas Max Ferris: Because it’s leveraged!
Jonathan Hoenig: It is leveraged. And owning some of what I think are the lesser-known names in energy — these are infrastructure companies like Magellan Midstream Partners or Plains All American, which Wayne has talked about. To me it’s a smarter, more interesting, lesser-known play in energy.
Jonas Max Ferris: Ok, first of all you’re crazy for a couple reasons. Number one, someday this discount is going to be 10 or 15 percent. These types of funds always do that. But the biggest problem is… you hate giving tax money to the government! This is a corporation; it’s not like a mutual find like most funds. And it owns partnerships which are past due entities. It’s going to pay corporate profit tax possibly on some of these gains, and then you’ve got to pay tax on it. It’s the most tax inefficient way to own a partnership.
Jonathan Hoenig: My late father used to say: if you’re paying taxes it means you’re making money. So if that’s the worst, I’ll stick with it.