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
Brenda was joined by: Gary B. Smith, RealMoney.com columnist; Pat Dorsey, director of stock research at Morningstar.com; Tobin Smith, founder and chairman of ChangeWave Research; Scott Bleier, president of HybridInvestors.com; Bob Froehlich, chairman of investor strategy at Scudder Investments; and Dani Hughes, president & CEO of Divine Capital Markets.
President Bush presented his plans for the next four years in the State of the Union. Wall Street listened closely because of utmost importance in an ambitious pro-business agenda is saving Social Security. This means that the battle lines between Republicans and Democrats are clearly defined!
Bob Froehlich: President Bush’s program is very investor friendly, and that is what Wall Street likes. Flat tax gets rid of accountants. Tort reform gets rid of lawyers. And if Social Security gets privatized, we’re creating the greatest investment class in the history of time! But it’s not a Republican or Democrat thing. In fact, during the past 60 years, the market has actually done better under a Democratic administration.
Tobin Smith: Republicans are going to push and push and push for a reform in Social Security and the come to some conclusion. It’s foolish to keep it the way it is, which is basically a bankrupt system. But when one considers the tax cuts and better than expected results in Iraq, why don’t we have a bull market?
Pat Dorsey: We don’t have a bull market due to, among other things, the deficit.
And it’s only going to get a lot bigger, because if we go to personal accounts, we’ll have to borrow $1-2 trillion to fund it.
Gary B. Smith: Wall Street knows what it wants done, now it just has to wait and see if these things get done. The market is still trying to recover from the January debacle. I think we’ll retest the lows before heading higher. The most important thing for Social Security reform is giving the American people the right to choose what they want to do.
Dani Hughes: Investors are concerned about how choppy the market has been. But the bigger fear is how are we going to pay for the reforms that President Bush wants to make?
Scott Bleier: This is going to be a huge fight in Washington, D.C. Wall Street loves that because it’s going to be tough to get anything done. I think we’ll see a near term, big rally. The Democrats established the New Deal and the Great Society and Bush is trying to tear it down. Of course they’re going to fight him tooth and nail.
Which stocks are set to rally now that the President has laid out his plan in his State of the Union address?
Dani: I like the utilities company, Cinergy (CIN). The President is pushing for leading edge technology like clean coal. The U.S. gets 52 percent of its electricity from coal. It’s easy, cheap but it’s really dirty. His plan is to clean things up, which means Cinergy is set to do well. (Cinergy closed on Friday at $40.54.)
Scott: The environmental costs are going to hurt their bottom line. It has a nice yield, but it’s not growing.
Tobin: Nuclear power is going to benefit. I like Exelon (EXC) because it has lots of cash flow and the opportunity to open additional plants. I own and recommend. (Exelon closed on Friday at $45.75.)
Dani: Surprisingly, I like it.
Scott: I also like it. Plus, Exelon is buying my power company, Public Service Enterprise Group (PEG).
Bob: This isn’t one where I would be putting my money. Additionally, the company has poor management and customer service.
I’m betting on financial services company, Bear Stearns (BSC). It has great asset management and great capital markets. This is one of the best-run companies on Wall Street. I even own the stock. (Bear Stearns closed on Friday at $102.95.)
Scott: It would be better to buy a higher margin business, like Goldman Sachs (GS). I don’t like it.
My pick is defense company, DRS Technologies (DRS). The President said he will spend more money on energy and defense, so that’s where investors need to be. DRS is growing at a good rate and I think it is worth $60. (DRS Technologies closed on Friday at $41.36.)
Dani: I don’t like it. The stock already had its run in 2002.
Tobin: I agree with Dani. This isn’t going anywhere.
Chartman: Stock Super Bowl!
Pat: I’m betting on the New England Patriots and Iron Mountain (IRM), based in Boston. Iron Mountain is a document storage company, which means it makes money by charging customers money to store their items. It has lots of cash, gets a lot of recurring revenue, and I think it is going to $39 over the next year. (Iron Mountain closed on Friday at $28.64.)
Gary: My question is, “Why is Iron Mountain down so much?” This is not a bad stock, but it hasn’t been doing well. In keeping with the Super Bowl theme, it’s 4th and long for this stock! Punt unless it closes above the downtrend that began late last year.
I’m going with the Eagles and CIGNA (CI), which is based in Philadelphia. CIGNA tackled a long downtrend and resistance line making it a strong stock. Touchdown! It’s going to $100. (CIGNA closed on Friday at $83.18.)
Pat: This is a horrible company and I wouldn’t touch it. CIGNA doesn’t have any competitive advantages in the very heavily regulated healthcare industry. Plus, it’s losing members.
Tobin's prediction: Altria (MO) boosts dividend after tobacco-friendly ruling; goes up 20 percent
Gary B's prediction: "Hire" Martha Stewart's stock (MSO); Apprentice show a hit; stock up 50 percent
Bob's prediction: Banks not tanks win under Bush; PNC Financial (PNC) going up 25 percent
Dani's prediction: Snack food can make your wallet fatter; Pepsi (PEP) going up 20 percent
Pat's prediction: Let "TurboTax" give you "Turbo" profits; Intuit (INTU) going up 30 percent
Scott's prediction: Super Bowl indicator is bull; AFC's Patriots win; market up!
Cavuto on Business
Neil Cavuto was joined by Jack Welch, president of Jack Welch LLC; Gregg Hymowitz, founder of Entrust Capital; Ben Stein, author of "Can America Survive?"; Charles Payne, CEO of Wall Street Strategies; Barbara Corcoran, founder of the Corcoran Group; Gary Kaltbaum, president of Kaltbaum & Associates.
Neil Cavuto: Forget about Social Security! Is real estate your ticket to real gold in your golden years?
Barbara Corcoran: The best thing about real estate is that everyone is in it right now.
Neil Cavuto: That's what worries me.
Barbara Corcoran: It shouldn't worry you. Four out of ten people this year who are buying a home are buying their second home. So a second home, a third home, it’s not a rich man's game anymore. Everyone is into the game, and I think that's the best insurance in real estate.
Jack Welch: Real estate is something you want to buy to live in. You want to leave real estate investing to the pros.
Gary Kaltbaum: I hate disagreeing with Barbara Corcoran because she's one of the nicest people I have ever met. But the problem is everyone is already in, and you've already had a big move. Timing is everything, and there's a bubble mentality in certain areas right now. If interest rates start to go up, housing prices could come down. I just think it's the wrong time here.
Gregg Hymowitz: Gary's right. The biggest risk to real estate is interest rates. And it seems like interest rates have to go up considerably because the economy continues to improve. Or interest rates stop going up because the economy starts slowing down. In the near term real estate doesn't seem that attractive.
Ben Stein: Historically stocks have outperformed real estate. We've seen a rapid growth in prices in the last couple of years. Obviously that won't last. The idea of using real estate as social security doesn't make much sense. If you sell it, to live off the interest of it, you don't have it anymore. That said, you have a huge tidal wave of baby boomers washing up on the real estate shore who are going to want second and third homes. Not all of them will be rich enough to afford them. A few million will. I think that'll keep the second and third home market going for a while.
Barbara Corcoran: I want to add to what Ben said. Do you know that 60 percent of those baby boomers retire without any savings at all? And it's not new news that these people who are retiring now are relying on the equity on their home.
Gregg Hymowitz: That's the scary part of real estate, that so many people have been sucking out the equity in their homes.
Barbara Corcoran: That's been so overstated. Less than 5 percent of the equity in their homes has been borrowed against.
Gregg Hymowitz: Just like corporate America bailed themselves out with low rates, everyone was able to buy real estate because capital was cheap. As capital gets more expensive, I think real estate is going to suffer.
Ben Stein: It will slow down and obviously cannot continue at this pace. But whether or not we'll have a crash is a very open ended question.
Neil Cavuto: And another issue that's raised Jack is that supply and demand will trump any other of the concerns we've raised here at this table.
Jack Welch: Look, I'm totally in the game of live in the damn thing.
Neil Cavuto: Well, in your case you could live in a lot of damn things. Don't you own Nantucket?
Barbara Corcoran: He owns more than Nantucket.
Jack Welch: To bet on real estate as a retirement nest egg is not really a game I like.
Neil Cavuto: Yes, but you can't live in a stock. You can live in a nice home that appreciates in value and usually the value of a home exceeds that of a stock you own. So any small percentage gain is pretty measurable, right?
Jack Welch: I think that's meaningful, but I don't want to be drawing it out and be exposed to an interest rate spike.
Gregg Hymowitz: What was GE's view on real estate? Did you guys own a big real estate portfolio?
Jack Welch: Yes and I saw them go up and go down. We had some tough periods in the late '70's and the late '80's.
Gary Kaltbaum. I just don't think the average individual knows how to buy real estate.
Neil Cavuto: Well, they know how to buy real estate investment trusts, right?
Gary Kaltbaum: That's true. They're fine but they've also had a big run. If I saw a 15-20 percent drop and they've already started, I think there are some great plays there. But if you buy a home in the wrong place like Las Vegas and some areas of California, they've dropped 20-25 percent already. So you have to be very careful right now.
Ben Stein: Gary, you are dreaming. I don't know where you live, but that's not happening. The real estate market in Southern California is incredibly strong.
Neil Cavuto: He's actually right in Las Vegas.
Gary Kaltbaum: And there have been parts of Northern California and Silicon Valley that have gotten whacked. I've read the articles and I've checked the numbers.
More for Your Money
Neil Cavuto: The hottest stocks in today's fastest-growing industries. Will they help you get more for your money?
Charles Payne: I like health care. Assisted living and nursing homes are a way of life. It's a hot group and it will stay hot for a while. I like Genesis Healthcare (GHIC), which is a relatively unknown stock.
Gregg Hymowitz: The problem with that stock and this sector is that with a new Homeland Security Secretary and with so much pressure on Medicare and Medicaid, there's a big risk in these nursing home stocks that reimbursements get lowered here. So I think a stock trading at roughly 18-19 times on forward earnings, I think it's a rich stock with some risk.
Neil Cavuto: So what are you buying?
Gregg Hymowitz: Sort of my tribute to the Super Bowl. America loves to gamble and continues to gamble. The stock we like in that sector is Las Vegas Sands (LVS). It's one of the best run companies. There's tremendous cash flow. Cash flow has grown 30 percent a year.
Neil Cavuto: So you're down on health care, but you're up on sin and gambling.
Gregg Hymowitz: Exactly. Well said.
Neil Cavuto: Ben Stein?
Ben Stein: Again, for the millionth time, the trend is retirement. That means people are going to be worried about where to put their money. I think the financial sector is an incredibly strong sector. I like Washington Mutual (WM) because I think it's an incredibly well run bank. It's a small bank, and I think it's going to be acquired. It's a good acquisition play.
Neil Cavuto: They're saying that retirement investing will be the big theme in the next decade or so. Do you buy it?
Jack Welch: Yes, but my bet for an industry is entertainment. The amount of opportunities that are available in content and distribution is just incredible. Games are going to be huge.
Gregg Hymowitz: Is there enough advertising revenue to support all of that?
Jack Welch: Take a look at the paid advertising in search these days. It's just exploding.
Charles Payne: So it's really more on the technology side of entertainment than on entertainment itself.
Jack Welch: I'm also talking content.
Charles Payne: AOL was going to be the ultimate content play and a lot of people got burned pretty badly.
Jack Welch: What happened with AOL is timing and no integration and a bunch of other things. But the concept in general is not a bad concept.
Neil Cavuto: But if someone wanted to buy an entertainment fund they'd be well off — they could choose between a Newscorp or a GE?
Jack Welch: That's my viewpoint.
Ben Stein: The beautiful thing about entertainment stocks is they're not susceptible to foreign competition. I like that sector quite a lot as well.
Neil Cavuto: Gary, what are you doing?
Gary Kaltbaum: OMI Corp (OMM). The shipping rates are as strong as can be. They ship oil and the like. Demand is strong, and I like the fact that the insiders in this company just bought on this pullback. I think there are a good few more quarters to go here.
Charles Payne: If we're talking long term and what's going to be hot, I think these guys are just about peaked. Oil is in a range where it's not going to go lower, but it's not going to go higher either. You're going to pay a lot of money for this stock. Traders are playing this stock right now. There are going to be opportunities to go in and out, but I think for the average person watching this show, it's too late for this.
Head to Head
Neil Cavuto: Howard Dean's infamous primal scream might've been the sound of a campaign imploding, but now it looks like the Democrats are about to resurrect Howard Dean and crown him their leader. Would Wall Street welcome that move?
Jack Welch: I don't think the party chairman matters a lot to Wall Street. That one scream is a bad image of him, and it will live with him forever. He's probably a lot smarter than he appears, but I don't think he's any threat to George Bush or the Republicans.
Neil Cavuto: Jack, one of the things I admire about you having worked for you and followed your career, you're very passionate and you instill passion in people. Howard Dean instills that. He recruited a million people into the Democratic party. People follow him and watch him very closely. I think it's debatable whether he's all that left of the party. And I'm wondering whether Republicans are sort of sloughing this off?
Jack Welch: He's just going to get more and more of the base. I can't see this guy reinventing himself. In his bones, he's a Volvo driving Vermont lefty if there ever was one.
Neil Cavuto: Harold Ickes, who was on our air earlier this week, was telling me that Hillary and Bill Clinton were fine with this. What do you read into that?
Jack Welch: They had to keep their hands in their pockets and not pull any powder out. They can't afford to make any bad moves and go for the wrong person here. And obviously Ickes would've been the right person.
Neil Cavuto: You're a great student of history. I can remember the Carter folks in 1980 praying that Ronald Reagan would get the nomination. And I'm wondering, there are all these Republicans praying that Howard Dean becomes the Democratic National Committee head and they might be making the same mistake.
Jack Welch: I don't think they're praying that. Howard Dean will be able to get his base to be very supportive. But I don't think anybody voting for President sat back and thought who's the party chairman?
Neil Cavuto: But if you have a guy who's going to be very effective on the local level, and after all, had you swung 60 or 70 thousand votes in Ohio, you and I know it could've been a different election.
Jack Welch: Don't go to that argument. There's 10,000 in New Hampshire, 50,000 in Michigan. You can play that game in every state. This is a very dicey time for the President. We have a Social Security battle that could derail the Congressional elections in the next couple of years if they don't go right. But I don't think the Dean thing is critical issue.
FOX on the Spots
Ben Stein: Iraq election win leads to Bush's Social Security reform!
Barbara Corcoran: Bush's Social Security reform is "bait and switch" game!
Charles Payne: Bush spends on U.S. infrastructure; buy Ingersoll Rand (IR).
Jack Welch: Tort reform passes and the judicial logjam is relieved!
Gregg Hymowitz: More co's follow GE out of Iran forcing negotiations!
Neil Cavuto: In the Iraq elections, we might get a Shia dominated government that’s not all that friendly to us. But better an unfriendly democratically elected government than a despot. Besides, we're used to dealing with unfriendly democracies. Look at France. We'll survive and the region will thrive.
Forbes on FOX
In Focus: Social Security: Is There Really a Crisis?
Jim Michaels, editorial vice president: Yes, there is a crisis and the time to deal with a disaster you see coming is before it hits. When the tsunami wave hits the beach it's to late to save yourself. You have to act when you see the turbulence out there. Social Security is a wonderful program. It's worked very well, but it's 70 years old. And the world has changed drastically since it was brought in. When it was brought in, the average person lived to 68. They were on Social Security for three years. Now the average woman lives 17 years on Social Security, the average man a little less.
Mike Maiello, staff writer: I have seen global warning projections that have disasters that are going to come faster than the disaster Bush claims is coming in with Social Security. He's not being a drama queen about global warming. He's got an agenda here, he doesn't like a successful government program. He uses one set of optimistic data to claim that he is going to cut the deficit in half by 2009 and then he uses a pessimistic set of data to claim that Social Security is going to collapse.
Steve Forbes, editor-in-chief: The numbers are the numbers, and just because a time bomb has a long fuse doesn't mean there is an argument to letting it eventually go off. The system demographically is in deep trouble. In 2018 the projections are that it will start to pay out more than it takes in. And there is a moral issue, the miserable return that young workers get on the money they put in. If you did that in the private sector, Washington would have you in hearings and put you in jail.
Neil Weinberg, senior editor: There is no crisis and that is the problem! You might agree with George Bush or you might disagree. But to suggest that this is a crisis when we are talking about running short of money in 40 years just brings this to an ideological shouting match opposed to an intelligent discussion of what we need to do.
Victoria Murphy, staff writer: I think it is a crisis if you are my age. And I'm surprised that Mike is pointing out that Bush has an agenda. What agenda did Clinton have when he said Social Security was in crisis? Sure there is political infighting going on here. But the truth is that in 1960 there were five workers for every Social Security benefit recipient and now there's three and in 30 years there will be two workers for every person on Social Security. I side with Jim, we have to be looking ahead here.
Quentin Hardy, Silicon Valley bureau chief: My generation has amassed a large volume of stocks that we have to sell to somebody because we are retiring now and if we sell them all at once we are going to lose a lot of money because the market is going to go down. Instead, we are going to sell them over five years. That's very fast for stocks that you accumulate of twenty years. We need someone to buy them, it's Victoria's generation, with the privatized savings account that George Bush is going to give them.
Jim Michaels: Quentin, I've got news for you. Nobody is going to take your money and put it in stocks. You're going to have the option to put some of your money in stocks. Basically for people under 50 years old and you don't even have to put it in stocks, you can put it in bonds and you'll still do a hell of a lot better than you are doing in Social Security.
Quentin Hardy: That's a new buyer for the stock market and that is what this is about.
Steve Forbes: There's the federal thrift plan, that hundreds of thousands of federal workers are in now. They have an array of funds and you make your choice. They're diversified funds guaranteed for safety and soundness and you take your own risk. And you also can put in a provision that as you get older you can adjust the portfolio automatically to have more bonds, more short term instruments and fewer equities so that you don't risk it all at once.
Victoria Murphy: I think we still need to figure out the numbers here but the amount that Bush is talking about, just a third of your Social Security payment, is really not that much coming into the market in reality. It's a fraction of mutual fund inflow every year. It's not this huge influx that you would think it is.
David Asman: The question is the government gets this cash in and they don't put it in a lock box. They put it in IOUs.
Mike Maiello: The money is going in treasuries, so unless you are predicting a default on $1.3 trillion in U.S. treasuries, that's not a problem.
Steve Forbes: Mike, the problem is, they have to get the cash. They've already spent the cash. They have to raise taxes or borrow it.
Quentin Hardy: We are looking at an actuarial problem here. We should probably cut benefits by raising the age faster than we are planning on raising it. People are living longer than they use to. We should also probably think about raising the cap to a $200,000 a year income, that would effect a very small amount of the population and you get rid of this projected deficit.
David Asman: There are a lot of people who have planned their lives around retiring at a certain age. Isn't this screwing them?
Neil Weinberg: It's not going to screw with people over 55 because Bush has said that he is not going to mess with that part of Social Security.
David Asman: I'm talking about if you raise the retirement age.
Neil Weinberg: The reality is, everyone is talking about this from an ideological point of view. Either you are for people investing for themselves or you are against it. But no one is talking about the hard numbers, about how much we'll actually have to raise the age at which you would retire or how much would we have to lower the benefits or raise the Social Security tax to get to the same place. The fact of the matter is, poor people want the security of something.
Jim Michaels: The point is not the retirement age, we're talking about private Social Security funds! Should some of this money be put into accounts that you control and you own instead of making you a ward of the government.
Steve Forbes: Europe's already got a crisis. The nice thing about having your own accounts is you pick your retirement age instead of the Washington politicians.
Flipside: The Flat Tax Is a Bad Idea!
Neil Weinberg: Round, square or flat it's an income tax. For 100 years this country did fine without an income tax. We don't need an income tax. We have not enough savings in this country, let's go to a consumption tax. It's very simple to implement and it would solve a lot of problems.
Jim Michaels: I think the idea that we don't need an income tax is ignoring the fact. The great thing about the income tax is the more you earn the more you pay and therefore you're payment is proportional to your means. The consumption tax hits the poorest people hardest. For people who are thinking that the flat tax is a free give away to the rich and affluent they are forgetting that the flat tax, the plan that Steve recommends, a family of four making $40,000 a year pays zero in taxes.
Elizabeth MacDonald, senior editor: There's another issue here. There's a reason that the IRS is America's museum of mass confusion. It's because the two top tax writing committees in Congress get the most in the way of campaign contributions. And they are the ones that are writing the loop holes into the system. You know Einstein needed help with his taxes.
Quentin Hardy: Well Mr. Forbes, in 1996 you proposed a flat tax, you did really well, you made a lot of ground and in 2000 every politician co-opted your message and you didn't do as well because they co-opted your message and they didn't do anything about it. They don't like the flat tax. You know why? Because politicians are business men. They buy campaign contributions and they sell favors in taxes and they sell pork on the government contracts. That's the reality that we have to live in.
Steve Forbes: I think that is an argument for the flat tax and why the President should propose it. It's a source of corruption and a source of evil. Six years ago, Money Magazine took a hypothetical tax return and had 45 experts do the tax preparations and came up with 45 different answers. You can't even comply with the code, you don't even know what's in it.
Jim Michaels: Quentin just gave the greatest argument for the flat tax that I can think of. There are hundreds of thousands of talented people wasting their time as tax lawyers and accountants. They could be free for more productive work. Maybe some of them could be used to teach journalists something about economics.
Quentin Hardy: I'll tell you what is going to change this tax system more than anything else. Full enforcement. I want to see more IRS enforcement. I want to see people forced to pay the full limit. You will see government revenues pouring in.
Elizabeth MacDonald: The IRS can't even understand the system. The system is so complicated, there are about 26,000 people who work for the government who don't file because they don't understand it. Even Albert Einstein needed help with his taxes.
Neil Weinberg: The other problem with the flat tax is that people are gaming the current system we have. Why aren't they going to game the flat tax as well? Steve, are you going to get rid of the mortgage exemption?
Steve Forbes: I give a tax cut, I give you a choice. If you want to stay with the old system, go ahead. The nice thing about the flat tax is there is no place to hide, no place to play games like Enron and WorldCom did. What you make is what you pay. 17 percent over $40,000 and it can all be put on a single sheet of paper.
The Informer: Merger Madne$$
Lea Goldman, staff writer: Google (GOOG) should buy Check Point Software (CHKP). I like Check Point, it's a cyber security firm. Basically, Google is encroaching on Microsoft's turf with the search functionality. Microsoft is now going into cyber security, Google should too.
Victoria Murphy: Microsoft has been saying that it has been wanting to get into security for years. Google hasn't done big messy acquisitions and I don't think that they should start. I think that they are great at doing internal R & D.
Mike Ozanian, senior editor: I think Dell (DELL) is going to buy Hewlett-Packard (HPQ). Hewlett-Packard is a horribly run company and needs to be put out of its misery. It has one great business, it's printer business, which has very fat profit margins. The rest of it stinks. Buy Hewlett-Packard.
Chana Schoenberger, staff writer: There's no way. It's not even remotely Dell's strategy. HP's printers are great but Dell has printers already.
Mike Ozanian: It's a long shot, playing this game is like going for a homerun. You might strike out, but if you win you'll hit a homerun.
Victoria Murphy: A lot of people out in San Francisco say that Oracle (ORCL) might buy Sybase (SY). Sybase has for a long time been one of Oracle's database rivals. Sybase is having success in the wireless market. I don't think this is going to happen but I like Sybase, I think it's a healthy company and they're doing the right things, I'd buy that one.
Lea Goldman: Larry Ellison, from Oracle did look at Sybase and he passed because it would be hell trying to integrate these two companies, that's how different they are.
Victoria Murphy: I don't think you can bet solely on mergers, but I do like Sybase. Wireless is taking off, so buy Sybase because you think it's a good company, not because you think someone is going to take it over.
Chana Schoenberger: I think it's too risky to pick an individual company that you think is going to be a takeover target. There is going to be a lot of consolidation in tech so you can buy an exchange traded fund like Vanguard Information Technology VIPERs (VGT) which has an extremely low expense ratio. It's practically free to buy and it will track the performance of the tech sector. If mergers go through and they make companies better everyone makes money.
Mike Ozanian: The best thing I can say to that is if you're the kind of football coach that on 3rd and 1 would run the ball, then buy that stock. You're never going to make a touchdown but you might make a first down.
Makers & Breakers
• Bear Stearns Companies (BSC)
Patricia Powell, president of Powell Financial Group: MAKER
You just had a segment on mergers, well this is a company that is going to be making money by other companies merging not just by merging themselves. And if the President passes his privatizing social security plan, it will help this brokerage firm.
David Asman: You target is $132, that's about a 30 percent hike. (Friday's close: $102.95)
Elizabeth MacDonald: MAKER
I'm a maker on this stock. It's run by Jimmy Cayne, who is one of the sharpest, smartest, most intelligent guys on Wall Street. He's got a ton of integrity. But also, this is a company that may be bought out itself. We have HSBC, Citigroup and Deutsche Bank circling possible. So maybe it's a merger play.
Mike Ozanian: MAKER
I'm a maker too. The management is such tight wads when it comes to expenses. They use to make employees count how many paper clips they used. I like that kind of management watching my money.
• Viacom (VIA.B)
Patricia Powell: MAKER
This is not for everybody. This is a risky stock, but I think this is a composite of businesses in the right place at the right time. One could expect higher advertising revenue growth as part of the continued business recovery (particularly at the cable networks). They own a lot of entertainment household names like CBS, MTV, Infinity Radio and Paramount.
David Asman: You like it now and think it could go up to $50, that's about a 30 percent gain. (Friday's close: $38.78)
Mike Ozanian: MAKER
I'm a maker. This stock is 50 percent off it's five year high and it's selling below it's asset value.
Elizabeth MacDonald: BREAKER
I'm a breaker, I wouldn't put any money in it. I don't like any entertainment stocks, especially ones run by ego maniacs—Sumner Redstone. The only good thing about this company is Comedy Central.
Patricia Powell: You do have an ego maniac running the company, they have a three year plan where he is going to be moving out. He's got an $8 billion stock repurchase plan that's 12.5 percent on the stock, just on the repurchase.
Stock Smarts: Bigger Home Boom?
It was another super year for the housing market, the fourth year in a row of record new home sales. And prices also kept on heading north:
New Home Sales: UP 8.9 percent in 2004
Median Single-Family Home Prices: Up 12.3 percent in 2004
So will 2005 be an even better year for homes?
Tom Adkins, Re/Max Property Center: Absolutely. Here are the reasons: first, we're about to hit a spectacular economy. It’s catching on fire. And everybody is agreeing. Hardly anybody saying it's not.
Terry Keenan: The stock market is saying the economy is not so hot, maybe.
Tom Adkins: Yeah it is. Here is what will happen this year. First of all, we have inflation that's running about 1.5 percent. That’s nothing. We have net income that's rising about 4.5 percent to 5 percent. That difference, every year, determines how much real estate value will go up. And also the second thing is that people say ‘Alan Greenspan is raising interest rates.’ It won't matter because the mortgage interest does not depend on Alan Greenspan anymore. The mortgage industry is now out to the free market, and rates are staying low.
Terry Keenan: But Wayne, we just saw the housing inflation is 12 percent. That certainly is not keeping pace with incomes. Do you think boom can continue?
Wayne Rogers, founder of Wayne Rogers & Company: I don't have a crystal ball. But the housing market is very hot here in New York, hot in parts of Florida, hot in Arizona, hot in southern California. There are other places where it's not so hot. I can't call it, but I think it will stay hot for the next six months. But be careful. As interest rates creep up, the absorption rate begins to decline. Then you see prices decline.
Dagen McDowell, FOX Business News: Another problem is you've seen housing prices run up so much that affording a home, for many Americans, is becoming a problem - particularly in some of the bigger metropolitan areas and that will be a headwind.
Terry Keenan: There was a steady out that showed 90 percent of the people in Westchester couldn't afford their own home now at current prices.
Gretchen Morgenson, business editor at The New York Times: It has become a problem in New York City — off the charts. I think that as the economy heats up, if you are right, you really will see an increase in interest rates. And yes, Alan Greenspan has not moved the mortgage market, but sooner or later those rates are going to go up and you will have a lot of problems from people who have the variable rate mortgages who are suddenly going to be facing down a monthly payment that is way off the charts.
Jonathan Hoenig, portfolio manager at Capitalist Pig Asset Management: Gretchen, I think you're right. The place where people will get hurt, Terry, is where they have ‘over leveraged’ themselves. These people, who have taken out the interest-only mortgages or bought too much house than they can afford, they will get hurt. But I don't see signs of a bubble. I've looked at home builders like KB Home (KBH) and Ryland (RYL); these are hot stocks right now.
Terry Keenan: They still are.
Jonathan Hoenig: You’ve got to live somewhere, and the part of the ownership society means owning a home.
Terry Keenan: You can always rent. Jonas, what do you think? Is there a housing bubble?
Jonas Max Ferris, founder of MAXfunds.com: There is one big sign (of a bubble) and what we are talking about is new home construction. New home construction is the IPO of the housing market. In 1999, we had a massive increase in IPOs, and stocks continued to go up. The next year it all fell apart. If you think about it, the real estate market is in the same situation right now. Massive new flood of new supply, and it's really that supply that marks the top of the market because the demand eventually can't pick it all up. There are too many new homes being put out there.
Tom Adkins: We have far more demand than supply. I've talked to new construction sites, individual sites all over the country. They can't keep up with the demand.
Jonas Max Ferris: Tom, we had too much demand for IPO stocks in 1999 as well. Remember the stocks used to pop 200 percent? It's the same thing.
Terry Keenan: Are you buying real estate here?
Tom Adkins: Yes — probably somewhere between 10 and 15 single family homes this year, big ones to rent out. Maybe more.
Terry Keenan: But the rental rates are not commensurate with the increases.
Tom Adkins: It depends on where you go. There are a lot of areas of the country where you can buy a $500,000 house and rent it out for positive cash flow and get 10 percent to 20 percent appreciation. Not in New York City but most places of the country you can do it.
Dagen McDowell: But there are a lot of areas where you can't get the positive cash flow, and that's where you see weakness.
Tom Adkins: Don't buy there.
Wayne Rogers: I think Gretchen is right. I don't know the timing of it; whether it’s six months or a year. As I said, the absorption rate will begin to decline. Prices will begin to decline. And there is another point that you made. You are at the top of a pricing factor. There’s just so much you can afford. People cannot afford these houses anymore. What measures this is not the cost of the house. It's how much the monthly payment is that I'm paying on the mortgage? So a guy looks at that and says that's it.
Dagen McDowell: But some of the folks who got into one-year adjustable rate mortgages last year, they're seeing their payments starting to go up.
Wayne Rogers: A very good point.
Terry Keenan: But 40 percent of these mortgages are these adjustable rate mortgages.
Gretchen Morgenson: They never existed before. And certainly the last time we had a bubble in the early 1990's, we never had the adjustable rate problem. I don't know when it will happen, but I think it will exacerbate it when it comes.
Tom Adkins: Here’s why you’re all wrong because the net income is rising faster than the adjustable rates are rising.
Jonathan Hoenig: Tom, you buy 15 single-family homes, how much of that do you actually own?
Tom Adkins: All of them.
Jonathan Hoenig: You own a mortgage, Tom. That's the thing I hear from a lot of people. They call me and say I own a $600,000 home. They only own about $200,000 of that. It's easy to become super-leveraged.
Tom Adkins: For 21 years, ‘Oh, my god, I can't believe housing prices have gone up $25,000 for a 3,000 square foot house,’ and now they sell for $500,000 to $700,000.
Wayne Rogers: There is a greater sucker theory. The merry-go-round will stop at some point and you don't want to be still on it.
Terry Keenan: You've been investing in real estate for a long time. And you've been jumping off the merry-go-round.
Wayne Rogers: I am scared to death. Personally, we bought a piece of property. I won't tell you what the pricing was, but we bought a piece of property and in four months it doubled.
Terry Keenan: Do you still have it?
Wayne Rogers: Are you kidding? I got to tell you something else, the people who bought it from us are selling it for a higher price. This is a greater sucker theory. Sooner or later someone is going to have to pay off the mortgage and say, ‘wait I can't sell it anymore.’ There is nobody there.
Terry Keenan: That goes to your IPO analogy, Jonas.
Jonas Max Ferris: To your rent analogy, rent is sort of the earnings of a property but those can be overstated as well. Cisco Systems (CSCO) and JDS Uniphase (JDSU) were growing big earnings, but eventually it all collapsed. And prices came down.
Jonathan Hoenig: For how long did people make money on Cisco and JDS Uniphase?
Jonas Max Ferris: You bring up a good point. People like me were early. Last year we said the housing market was over but that was like 1998 and stocks when a lot people got questionable about tech stocks and they still went up and everyone was saying ‘you are all wrong. It’s a 20-year great run,’ and then it collapsed. I'm telling you the proof is this new home construction. That's the IPO of the housing market.
Terry Keenan: How about people who don't own a home? If you already own a home, you are in and have to sell it and buy probably a more expensive home. If you are sitting on cash and don't own a home, would you wait this out, Dagen?
Dagen McDowell: No. Because you could get a fixed-rate mortgage if you plan to stay in the home for a really long time. It's not a bad idea. But if you take on a mortgage that could go up, your monthly payment, is very dangerous.
Terry Keenan: So lock in long term. You say the opposite?
Tom Adkins: Wrong. The most important thing is the value of your mortgage. How much do you own a property? That's the most important thing.
Terry Keenan: How much you own a property, the monthly payment could go up?
Tom Adkins: The principal balance stays the same. Your interest rate may rise or fall around it, but your principal balance is the most important thing over long time.
Terry Keenan: Gretchen.
Gretchen Morgenson: I worry about the folks who have taken a lot of equity out or all their equity or more than the equity in the house. And I think that will lead to a problem.
Wayne Rogers: I agree with her. I think that's absolutely right. I'm scared to death right now.
Terry Keenan: A young couple in their late 20's looking to buy a house; they have a nice nest egg but are renting, what would you tell them?
Wayne Rogers: I would say buy the house because you will live in it over a long period of time. But I’m talking about people who are out speculating in property, thinking ‘I could buy today for X and sell it for 2 X tomorrow.’
Terry Keenan: Jonathan, you've been positive on other real estate vehicles, the kind that you can sell every day, in the stock market, which would give me a little bit more confidence at night. But at what point would you turn negative on some of these REITs and things?
Jonathan Hoenig: I'm making money on real estate, Terry, but it’s in Argentina right now. That's about all I'll say.
Terry Keenan: And you don't see anything negative there?
Jonathan Hoenig: Not for the equities we own.
Terry Keenan: Jonas, do you like any of these real estate plays?
Jonas Max Ferris: The population growth just can't support the new home construction.
Best Bets: Super Bowl Stocks
Grab a cold one and your favorite snacks – we get our crew’s best bets at our Super Bowl party.
Jonathan's Party Animal: Smithfield Foods (SFD)
Friday’s close: $31.42
Jonathan Hoenig: I hope somebody brings pork rinds to my Super Bowl party, and I'm picking a pork producer Smithfield Foods. We aren't playing this area, but a lot of food stocks like Hershey (HSY) and General Mills (GIS) and others are kicking butt. I'm the one guy who has gained weight on the Atkins diet. I'm sticking with pork right now.
Jonas' Party Animal: La-Z-Boy (LZB)
Friday’s close: $14.28
Jonas Max Ferris: I can't think of a more Super Bowl play than reclining in upholstered furniture made in the USA.
Terry Keenan: This company has had lots of problems over the last couple of years. What do you think, Tom?
Jonas Max Ferris: Yes, cheap imports.
Tom Adkins: I like the chair and hate the stock.
Wayne: I think this stock is reclining.
Wayne's Party Animal: Boyd Gaming (BYD)
Friday’s close: $41.85
Wayne Rogers: I think the chart looks very good. They built a Borgata in New Jersey. The gaming stocks have been strong, and this is an undervalued one.
Jonathan Hoenig: Caesar's (CZR) is strong, but I'm skipping on gaming stocks right now. There is a regulatory thing here that makes me a little nervous.
Tom's Party Animal: AmBev (ABV)
Friday’s close: $27.05
Tom Adkins: You can't have a Super Bowl without beer. Who is the biggest beer manufacturer in the world? It’s AmBev. They’re in almost every country in the world. They make more beer than anybody else. Last year's growth of 20 percent net income growth.
Jonas Max Ferris: Tom, it's the beer that Brazilian soccer fans drink before they destroy the stadium. This is America's Super Bowl. Budweiser [Anheuser Busch (BUD)] is a Super Bowl beer. This one is for soccer fans.
Tom Adkins: Look at the chart and companies. They aren't even close.
Terry Keenan: We had Coors (RKY) and Molson getting together this week. Do you like the pick?
Jonathan Hoenig: The strongest liquor stock I can see is Constellation Brands, (STZ), but I wouldn't fight AmBev.
Wayne Rogers: Coca-Cola Femsa (KOF), which is also very strong in South America, has had a super last month.
Terry Keenan: You prefer that stock?
Wayne Rogers: I would have preferred it a month ago.
Stock of the Week
Mike Norman, founder of the Economic Contrarian Update, says Ariba (ARBA) is the one to watch this week
Mike Norman: This is a technology company that produces business productivity software, a major trend that will continue. But why I like this is most is because last week they missed on their earnings because of a one-time charge. And the street hammered the stock down by 40 percent. I mean, it is at a complete discount. Were it not for that charge it would have been profitable. I think this is a good time to get in and buy the stock when it's cheap.
Jonathan Hoenig: This stock is at $9. It used to be at $1,000 a share.
Mike Norman: And you still don't think it's cheap?
Jonathan Hoenig: How many times on the way down from $1,000 to $9 did people say, ‘oh the bottom is in. This is cheap — it's on sale.’ How low does it have to go for you to give up hope on this one?
Mike Norman: This company is profitable. It's situated in a theme: business productivity, which we know is so important nowadays. It's not going to go away. And the fact that it misses its earnings one time because of a nonrecurring charge, and they sell it off by 40 percent? Come on.
Jonathan Hoenig: Mike, you and I see the world very differently. I don't buy weak stocks. And I would rather buy Google (GOOG) than Ariba. This is not for me.
Question: “How much money would end up going into the market if Social Security goes private, and won’t this only be good for stocks?”
Gretchen Morgenson: No but it would have overall a very large impact on the stock market. I mean, frankly I think people are going to be told to put money in the stock market because the returns over time are greater. It is going to have a big impact.
Terry Keenan: Is it a good idea do you think?
Gretchen Morgenson: No, I don't think so. In a word, no.
Wayne Rogers: Why not, Gretchen?
Gretchen Morgenson: I think it's potentially problematic because people will make the wrong choices.
Jonathan Hoeing: With their own money, Gretchen? This is their money.
Gretchen Morgenson: And I don't want to have to pick up the pieces after the fact, after they lose it all in their Enron 401(k) and Worldcom 401(k).
Jonathan Hoenig: I worry when I hear these senators talking about a safe index fund. I don't want the government giving me investment advice but I want people to have control over their own retirement funds and I applaud President Bush for grasping on the third rail.
Dagen McDowell: And also you get to leave it to your kids or grandkids if you have excess which is something you can't do right now.
Wayne Rogers: Not only that, I think there are going to be rules about it, too. I don't think you can go out and invest in the racetrack as it were.
Terry Keenan: Probably like college plans.
Wayne Rogers: There will be rules.
Question: “I was looking for a stock that’s ‘off the beaten trail.’ What does the crew think about Tejon Ranch (TRC)? It’s in farm development.”
Wayne Rogers: It has approximately 270,000 acres of contiguous property 60 miles north of Los Angeles. So you've got to say at some point in time, we talked about housing earlier, that this is an enormously valuable asset. They also produce oil from that asset. But they have the chance to do large planned communities. And it's going to be a huge success.
Dagen McDowell: But a seven-hour commute from LA in traffic?
Wayne Rogers: That’s why nobody is going to commute from LA. People will build the communities, and are going to be right there. They will build colleges. They will have an entire city there.
Jonathan Hoenig: They actually grow nuts on this land, Terry. I wouldn't fight Tejon. Real estate is not dead yet. I hate to be on the same side as Tom Adkins, but I wouldn't count out real estate right now.
Gretchen Morgenson: I don't know. What do they carry it on? Book value? Is it one of these plays where the real estate has gone up so high that it's reflected in the stock? I'm just not sure. It is a hot play and hot market. No doubt about it.
Wayne Rogers: The stock is technically very sound right now, too.
Question: “I bought shares of Websense (WBSN) at $18. It’s now at $55. Is now the time to sell?”
Jonathan Hoenig: I think the answer is ‘let the market decide.’ This guy has a great winner. He didn't get to $55 by selling at $21 after he bought it at $18. Unless it is a huge part of his overall portfolio, unless it has become 10 percent or 15 percent of his holdings, sell half at $40, sell half at $35, you're done. Let the market decide.
Question: “What do you think about the Liberty All-Star Equity Fund (USA) and the Liberty All-Star Growth Fund (ASG)?”
Dagen McDowell: These are closed-end funds, so you have to pay a commission to buy them. I much prefer no-load funds where you don't have to do that. And if you want what you get with these funds, go to Vanguard and set up a distribution plan where you take your money out of the funds. That’s all you need.
Gretchen Morgenson: If you are in this growth fund, you had better love Internet stocks. They have like 25 percent of their portfolio in Internet stocks. The price/earnings ration is 155 on it. I’m just not there,
Terry Keenan: We had a blow up in those Internet stocks last year, up about 35 percent. Do you think it’s over?
Wayne Rogers: I bow to the fairer sex. I think they're right. I wouldn't touch this.