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Bulls & Bears
This past week's "Bulls & Bears": Gary B. Smith, Exemplar Capital managing partner; Tobin Smith, ChangeWave Research editor; Charles Payne, Wall Street Strategies CEO; Bob Froehlich, DWS Scudder chairman of investor strategy; Patricia Powell, Powell Financial Group president, and Lenny Dykstra, TheStreet.com columnist.
Trading Pit: Bush and Stocks Coming Back?
President Bush is starting to rally in the polls after the death of al-Zarqawi and a surprise visit to Iraq. Stocks are also on the way up. The Dow bouncing back strong this week after losing a thousand points in the last month.
Is this a big rally for both President Bush and stocks?
Bob Froehlich: Yes. What drives the stock market is what drives the President's approval ratings. Once we stop tightening interest rates, the economy and the market will rally, which in turn means the Bush rally will continue too.
Gary B. Smith: First off, I have to give Bob props from a few weeks ago when all of us thought the market was going to make a new high and Bob said, “Not next week.” We've been going down ever since! I do agree with him that everything fundamentally signals that Bush is on the upswing but the market needs to experience more pain. Right now, I think Bush's approval and the market are going in different directions.
Lenny Dykstra: Bush is definitely on the comeback trail. Bin Laden is dead. If he's not dead, I'll go over there and get him myself for the $25 million reward. We are in a bear market right now. Stocks had a nice little run on Wednesday and Thursday and there will be more of those stints. However, I think the Dow will hit 10,000 before the next World Series winner. I say, “Sell on strength.”
Charles Payne: The White House and Wall Street are both making comebacks. Both are down for the same reason: unrealistic expectations. When people think of the stock market, they are thinking back to the sell off of 2001. When they're thinking of the war in Iraq, they are thinking back to Vietnam. We are not in those times. Both the President and the market are going to come back up.
Tobin Smith: We always look at things we don't have control over. We got Zarqawi and that's a good thing. The newspaper articles on how the U.S. is winning the war are few and far between. It is the same thing with President Bush. All you read are negatives, but we are trying to turn that around. As for stocks, the “Toby Bottom” is in and the market is coming back.
Patricia Powell: Bush is bouncing back, but the market is not. It's just too soon. We've got to get through a tough couple of months this summer. But by the end of 2006, we will all be smiling.
The Nasdaq's been down, just like the president, but both are starting to make a comeback. Get the names that are ready to make the biggest comebacks.
Tobin Smith: Parallel Petroleum (PLLL) is really ready for a comeback. It has so many wells now and can pay them off in a year. This company has a lot of cash and I think it will double it in 2 years. The stock's worth $35. (Parallel Petroleum closed on Friday at $21.01.)
Lenny Dykstra: Energy is tired. I don't like it.
Charles Payne: I do like it. The stock looks good. It may not go up tomorrow, but it is one to have in your portfolio.
Bob Froehlich: I love stocks that pay dividends and this is one energy company that does not.
Gary B. Smith: I'm going with Adobe Systems (ADBE). When you look for a beaten down stock, you look for high reward and low risk. Adobe has fallen hard since April, but is ready to come back. I would just sell if it drops below $25. (Adobe Systems closed on Friday at $29.12.)
Pat Powell: The company's earnings are down 18 percent, so there's a reason the stock is down. Gary, this is why it's important to read the earnings report and not just look at the chart.
Tobin Smith: Adobe is going to have big problems coming in the next 6-9 months. It has to do with the company's whole franchise. I would not want to own now.
Charles Payne: It reported this week and the stock acted pretty well. It's a trade. I just might move the stop up from $25 because it's such a volatile stock.
Lenny Dykstra: My pick is Websense (WBSN), which is a software firm that keeps track of employees' internet use. It has a lot of cash and zero debt. I see it going to $27. I own the stock. (Websense closed on Friday at $22.10.)
Charles Payne: I like it, but don't buy on Monday morning. Wait until it breaks out to $23-24.
Gary B. Smith: It's going straight down. I'd avoid it.
Bob Froehlich: I don't like it.
Patricia Powell: NVIDIA (NVDA) is really the one ready for a comeback. The Nasdaq went down 12 percent in the spring, but this one went down about 3 times that. There's real opportunity with this stock because absolutely nothing has changed with the company. (NVIDIA closed on Friday at $21.66.)
Bob Froehlich: It could be a great company, but I hate the industry. It's going to be under tremendous pressure.
Lenny Dykstra: I love it.
Gary B. Smith: It is oversold. It could bounce, but is a bit risky right now.
Bob Froehlich: I love Dell (DELL)! I love both the stock and the product. It has the best business model out there. It eliminates the middleman. Dell knows how to work at a low cost and produce big profits. I own the stock. (Dell closed on Friday at $24.12.)
Lenny Dykstra: The last time people were buying Dell was when you had hair! I don't like it.
Tobin Smith: It continues to have pain. I don't want to own it. I've been short since it was at $35.
Patricia Powell: This is a boring stock. I'm not a fan.
Charles Payne: Qualcomm (QCOM) has been through these roller coaster rides before. I love this stock and think it is poised to lead the Nasdaq back. My clients own it. (Qualcomm closed on Friday at $43.95.)
Gary B. Smith: I like Qualcomm, but I like it in the mid $20s, which is where I think it's going.
Patricia Powell: I like it just as much as NVIDIA.
Tobin Smith: This is a good one to own, but buy it on a little pullback.
Big Gain$ & Lo$$e$
Will the real Dow please stand up? The Dow has had 8 days of triple digit gains, but also 8 triple digit sell-offs since January. Which is the real market?
Charles Payne: Both are the real market because both reflect the emotions of the market. Any time the Dow has pulled back in the past 50 years has been a time to buy.
Gary B. Smith: You don't recover from the recent big sell offs we have had in just a few days. It looks like stocks are coming back, but I think we'll go lower first.
Tobin Smith: I think it is okay to chop around. However, at the end of the day, after we go through this chopping period, we will be higher.
Lenny Dykstra: We have entered a bear market. I'm sticking to my guns and my prior Prediction that the Dow will hit 10,000 by the next World Series. Buy and hold is dead. Sell into strength.
Patricia Powell: It is a yo-yo market that will continue all summer long, but by the end of the year, everyone will be smiling. Be prepared with the list of stocks you want to own and buy on any dip.
Bob Froehlich: The gains are going to win. Earnings will drive the market and we are in the mist of a great rebound in the bull market.
Lenny Dykstra's prediction: Housing market crashes! Home prices fall 20 percent in 1 year
Gary B. Smith's prediction: "Toby Bottom" gets bigger! Dow down 500 points by Labor Day
Bob Froehlich's prediction: Gary's chart is upside down! Dow 12K by end of this year
Patricia Powell's prediction: Oil falls to $50/barrel by end of the year
Tobin Smith's prediction: Get out Gates! Microsoft (MSFT) gains 30 percent by next spring
Charles Payne's prediction: GOP caves and raises minimum wage; Labor Ready (LRW) up 25 percent
Bulls & Bears | Cavuto on Business | Forbes on FOX | Cashin' In
Cavuto on Business
Neil Bottom Line
Neil Cavuto: Forget talk that tax cuts only help the rich, there could be proof now that they help all of us. Now to all of those opposing tax cuts, apparently they do work. Since the second round of cuts in 2003, the economy has grown by 20 percent, more than 6 million jobs have been added, tax receipts are up 30 percent and rising faster than they have in more than two decades.
Jim Rogers: No, it's true Neil. We can spend our money better than Congress can, or better than George Bush can, or better than Bill Clinton can. We know what to do with our money. We save it, we spend it, and it makes things better. Send the money to me, not to Washington.
Rebecca Gomez: The problem is that the deficit would have been cut even further had the government not spent so much money. I mean, 7.5 percent spending increase for the first eight months of this fiscal year. Granted, we do have a war going on, so a lot of this went to defense spending. But if it were under a budget we could get the deficit under control and extend the President's tax cuts.
Gregg Hymowitz: You can't think that tax cuts are a result of the improving economy. First of all, remember that interest rates were lowered significantly and we all know that that boosted the economy. The key about tax cuts, and I am not against tax cuts, is that they were never targeting the middle class. We don't know if the economy would have done better if the tax cuts were more widely dispersed. The tax cuts were focused on the wealthiest people. And while the economy continues to improve, the middle and lower middle class continue to hurt.
Tom Petrie: Well, just remember that the energy industry is doing its part to help revenues grow.
Ben Stein: Well, tax cuts definitely work to stimulate the economy, but since Bush started cutting taxes in 2001, the federal deficit has grown by about $2.5 trillion. We had a recession, but we gave away $2.5 trillion worth of revenue. The economy is 20 percent bigger now than it was in 2000, income taxes are still less than what they were in 2000. So, tax cuts work to stimulate the economy, but they also work to create a giant deficit. We have got to put our fiscal house in order in this country.
Neil Cavuto: Ben, did you say this when Ronald Reagan was building deficits in the 1980s?
Ben Stein: You bet.
John "Bradshaw" Layfield: Ben is right when talking about fiscal irresponsibility. Our government has been fiscally irresponsible. President Reagan vetoed a bill because it had 187 earmarks. Last year, a bill had 6,000 and the President let it go through.
Neil Cavuto: Now I think that is the key point. Jim Rogers, the fault is not the tax cuts it's the spending?
Jim Rogers: It's the spending. Yes, the deficit and debt have gone through the roof, but it's Congress' fault because they keep spending all this money. George Bush keeps spending this money too. We have got to stop the spending. We don't have to raise taxes. We have got to cut the spending.
Ben Stein: Most of it is entitlements: Social Security, interest on the debt, defense, and defense pensions. It's just not going to happen.
John Layfield: Look at Ireland. They have the best growing economy. Lowering taxes does not punish the creation of capital. When you do that, you are killing your own economy. Lowering taxes is good for the economy.
Gregg Hymowitz: It's irresponsible to lower taxes in an environment when the deficit is doing what it is doing. You can't ignore the fact that the administration keeps cutting taxes.
Rebecca Gomez: But this administration does not think it is irresponsible. They feel that if they lower taxes, and give businesses a break, tax revenues go up. They are saying we have this war on terror, we have to spend money, and they are trying to make the best of the situation.
Ben Stein: Government spending has risen and the deficit has grown greatly. This is a crisis and the government is not doing its job.
Rebecca Gomez: Do you suggest that they cut Medicare and Social Security?
Ben Stein: I think that they should raise taxes.
Jim Rogers: Ben, you are telling me that Ted Kennedy can spend my money better than I can? We have to cut spending!
Neil Cavuto: Tom, what do you think of this notion that maybe because the deficit has gotten worse, the debt is piling up, and maybe we can't rush this tax cut.
Tom Petrie: I think that this is a smaller problem; the trade deficit is a bigger one. If you raise taxes, there will be more problems. If you keep the taxes where they are, the money will get spent.
John Layfield: This is two separate issues: cutting taxes and the growing deficit. The only way to grow the economy is to cut taxes. The only way to cut the deficit is to throw these politicians out.
Rebecca Gomez: None of them want to be voted out.
Head to Head
Neil Cavuto: Is Iraq the key to lower gas prices?
Tom Petrie: We are a long way from getting peace. The resource base is there for higher levels of production. If you can't secure the pipeline, you can't secure the ports, and then you don't get what you need to have peace.
Jim Rogers: Even if there is peace in Iraq, which there is not going to be, where is the oil coming from?
Tom Petrie: There is a lot of remaining resources to be developed in Iraq.
Gregg Hymowitz: Iraq is producing as much oil as it was before the war.
Tom Petrie: Right now, we are overproducing the world's demand by about 2 million barrels a day.
Meredith Whitney: I think that the volatility and uncertainty in Iraq gives a lot of people a lot of power that they would not have otherwise.
Gregg Hymowitz: If you cannot trade oil in the commodity base, what is the price of oil?
Tom Petrie: There may be a $15 premium.
Neil Cavuto: Ben, you think oil prices are very high right now, but will go down?
Ben Stein: I think that if we can get all of the oil fields in Iraq pumping, then we would have a giant addition to the world's daily production.
John Layfield: If you increase one million barrels of production a day, you are adding only one percent of total worldwide production. This is not a significant factor. Take out the fear of destruction and you have peace in Iraq. It is huge for oil prices to get stability in Iraq.
More for Your Money
Neil Cavuto: Stocks for Father's Day.
John Layfield: MEMC Electronic Materials (WFR). It supplies wafers for the semiconductor industry worldwide. It's gone from $9 to $50.
Jim Rogers: You just said the problem. The price has gone from $9 to $50 and everybody knows it. This is an industry that should be avoided.
Ben Stein: I love iShares Emerging Markets Index (EEM). The emerging markets were hit hard in the last week, and then they rebounded fantastically. That's where all the growth is. Their P/E ratio is still lower than that of the DOW or S&P.
Gregg Hymowitz: I think that you are better off staying in the United States. One of the company's we like is Crown Holdings (CCK) the leading producer of aluminum. Company generates one dollar eighty cents of free cash flow a year. I own this stock.
John Layfield: I don't know about that. This company has a huge amount of debt; they have to put out a lot of excess cash to service that debt.
Jim Rogers: Buy sugar futures. It's easy, not complicated.
Gregg Hymowitz: Commodities make sense, but for only a portion of your portfolio. They tend to be extremely volatile.
Jim Rogers: The NASDAQ is much more volatile.
FOX on the Spots
Gregg Hymowitz: Bush's spike in polls is just short-term; will dip again
Meredith Whitney: No housing collapse; but stocks still best investment
Jim Rogers: Ignore Bernanke; inflation is here and getting worse!
John Layfield: U.S. "Coast" Ethanol is best bet; buy Pacific Ethanol (PEIX)
Ben Stein: Remember soldiers' Dads far from home on Father's Day
Neil Cavuto: Dems' "class warfare" agenda a loser in November
Bulls & Bears | Cavuto on Business | Forbes on FOX | Cashin' In
Forbes on FOX
Flipside: The Iraq War: Why GOP and Stocks Will Win This Year!
Rich Karlgaard, publisher: What a difference a week has made, the death of Zarqawi, Bush's trip to Iraq. And even here at home, the bounce back in the stock market. Rove has escaped indictment. What really impresses me is that the President Bush's new Chief of Staff, Josh Bolton, is really keeping this White House on message. The war in Iraq has always gone better than the media has projected it, but now they are back on the communications message. This is good for Republicans.
Quentin Hardy, Silicon Valley bureau chief: This week the president visited Iraq for a few hours. He didn't even notify the Iraqi government that he was going. The U.S. is still the de-facto power in the state and the government has no sovereignty yet. The Republicans are setting up these expectations that things are swell again and they are going to disappoint the American people if they do that. This war is far from over.
Jim Michaels, editorial vice president: Even the media has come to realize that we are winning in Iraq. The fact is, they are on the defensive. They lost their leader. Even the insurgents have admitted that they are on the defensive and that time is on our side. As the time passes it will become increasingly clear that we are winning.
Elizabeth MacDonald, senior editor: I still don't think this is enough of a pivot point for the GOP because I think they are heading into a perfect storm in November. I think that there is more on the voters mind than Iraq like immigration. I don't think this is enough to help the stock market and the GOP.
Steve Forbes, editor-in-chief: I think the Iraq war is going to stop hurting the President. We've done far better there than the media has recognized. The insurgency's back is broken. That's why they're trying to put the country in chaos, they know they've lost the war. I think what's going to hurt the Republicans is the feeling that they've been in power too long and they need to be punished. Also the economy is going to look worse than it really is and that's what's going to bite them in November.
Rich Karlgaard: People are tired of Republicans but as we get closer to November all we need to be reminded of is Speaker Pelosi, Charley Wrangle as head of Ways and Means, John Conyers as head of the Judiciary. Once they get a look at this hard left dream team, I think they'll go back to the Republicans.
Steve Forbes: Even though we know what a cast of characters these guys are and how destructive they can be, most voters aren't going to look at them. They're going to look at what the Republicans have done and not done. Ironically, losing the house in November will probably help the Republicans in 2008 because then the people will see nationally people like Pelosi.
Elizabeth MacDonald: I think if the Democrats do take control of Congress you can expect to hear investigation after investigation, hearing after hearing into what the administration has done. Voters are frustrated, they don't know why we've gone into Iraq. They don't understand what the benefit is for the American people.
Jim Michaels: I'm not sure that the economy is going to be a good issue for the Democrats. Besides Bernanke, I don't see the economy crashing. There are plenty of jobs around and people are unhappy about oil prices but I don't think they're so dumb to blame that on Bush.
Rich Karlgaard: I'm convinced that the White House, staying on a positive message, is communicating far better than they have about the successes in Iraq. This is going to have a positive affect on the GOP this fall.
In Focus: Was the Month-Long Sell-Off Overdone?
Steve Forbes: The sell-off was overdone! The economy is much stronger than it's been given credit for, even though it is going to falter a little bit this year. The bottom line for investing, when you feel good don't when you feel bad and the world looks bleak do it! We're in one of those periods where we are climbing the walls of worry. This is the time to start getting in.
Jim Michaels: There are some good buys around. But if you are going to take advantage of them, you need to have strong nerves. I see further turmoil ahead.
Victoria Barret, associate editor: You look at corporate profits and they're soaring. You look at stock market valuations and they're not that high. I think now is the time to buy. You might weather some hits this summer but I think once we get use to our new Fed Chief, which we will, the market will rebound.
Dennis Kneale, managing editor: Be willing to buy something and watch it go down and hold on to it and wait for it to go back up. The market overreacts to a whiff of bad news and under reacts to good news. We're so worried about inflation. The Fed is going to raise rates maybe two more times to 5.5 percent at the most. The experts say you should never buy a stock and want to hold it less than 5 years. In today's Internet age maybe two years.
Lea Goldman, staff writer: The fears of interest rates hikes are baked into the market but overall the economy is still strong.
Rich Karlgaard: I think the market is rational. It reacted to the other piece of news that gold has fallen. As gold falls, the dollar strengthens and then people feel better about buying dollar-denominated U.S. stocks.
Steve Forbes: I think the market anticipates trouble with the elections. It's already priced in. Stocks are currently undervalued.
Dennis Kneale: The reason the economy will be good is if politicians stay out of the way on either side of the aisle.
Rich Karlgaard: The market likes a Republican congress. After the Republicans took over in 1994, the market is up almost three times. A democratic president can't do a lot of harm when you have a Republican congress.
Informer: Bargain Funds
Victoria Barret: Bill Miller who runs Legg Mason Value (LMVTX) has beaten the market for the past 15 years. Right now he's doing something very contrarian. He's avoiding energy and investing in telco. The fund is down so far this year but I think it's going to rebound.
Dennis Kneale: 30 percent of their holdings are in consumer stocks and consumers are slowing down. This is an expensive thing to buy.
Victoria Barret: This guy knows what he's doing and their expense ratios are not out of whack.
Dennis Kneale: I like PowerShares Dynamic Semiconductors (PSI). It's down 15 percent in the last month. Goldman just recommended a couple big chip stocks that are some of its biggest holdings. It's a good time to buy.
Lea Goldman: If this correction turns into something far worse, semiconductors are going to be hit big time because corporate IT spending is going to fall and consumer electronic sales are going to fall. I like the ETF iShares Biotechnology (IBB). If you are worried about a bear market, biotechnology is something that survives in the long run. Everybody needs medical innovation.
Victoria Barret: This is too risky. The problem with biotech is that there are a handful of quality companies and there are a ton of companies that are totally risky. This fund is broad and has them both.
Jim Michaels: One of the hardest hit from the Bernanke crash has been emerging market stocks, down around 30 percent. I think the story is valid. It's the place to put your money. I like Matthews Asia Pacific (MPACX).
David Asman, host: Doesn't it look like a bubble. It still looks way up?
Jim Michaels: It's way up from a bottom, but after a crash is the time to buy.
Makers & Breakers
• Energy Conversion Devices (ENER)
Sara Nunnally, editor of Material Profits: MAKER
I think we'll see $4 gas by Labor Day. Summer is a cyclical month for gas and oil prices. We had a 15 percent rise in prices between July 1st and August 11th last year. I think higher prices at the pump translate into more people buying hybrid vehicles. I think this stock will double your money by next year. (Friday's close: $35.75)
Elizabeth MacDonald: MAKER
I don't think gas is going to $4 a barrel but I do like this stock. They have some big contracts coming up with Toyota.
Quentin Hardy: MAKER
I don't believe in $4 gas either. I don't see how at the end of the demand season you get prices going up. This stock has elements in mobility and batteries, it's a good buy.
David Asman: It hasn't gone up too much already?
Sara Nunnally: It actually was downgraded just the other day and the stock price has gone down a bit. It's a great buy.
• Sunoco (SUN)
Sara Nunnally: MAKER
I like Sunoco because they have a high exposure to the premium fuel markets. That's going to really pad the bottom line. (Friday's close: $64.00)
Quentin Hardy: BREAKER
Oil stocks have done nothing in the past year despite the profits. This one is up a little bit, what makes you think this is going to help?
Elizabeth MacDonald: MAKER
They are big in tar sands. They have a brilliant retail store strategy where they shove the costs onto the lessees.
Bulls & Bears | Cavuto on Business | Forbes on FOX | Cashin' In
Our “Cashin' In” crew this week: Wayne Rogers, Wayne Rogers and Company; Jonathan Hoenig, Capitalistpig Asset Management; Dagen McDowell, FOX Business News; Jonas Max Ferris, MAXfunds.com; Stuart Varney, FOX Business News; John Rutledge, Rutledge Capital, and Frank McKinney, author of “Maverick Approach to Real Estate Success.”
Stock Smarts: Will The Rest of the World Pay Up to Help Iraq?
A stern message from President Bush to the rest of the world, including a lot of countries in Europe: start paying up on the $13 billion that was pledged to help rebuild that nation. Are those countries going to do the right thing and pitch in here?
Stuart Varney, FOX Business News: Probably not. Europe has a history of appeasement. They appeased the Nazis, they appeased the communists and now they're appeasing the Islamic fascists. If they haven't got the courage to confront and fight, the very least they should do is pay up. But they probably will not. They ought to. Definitely.
Terry Keenan: Even though it would be in their economic interest down the road, do you agree?
John Rutledge, Rutledge Capital: Stealth trip (to Iraq), my butt. This was President Bush followed by cameras. It was a photo op following Zarqawi. It's a great idea, but three years late. They should have done this in 2003, not with the Europeans, but with the Gulf market. Gulf stock markets and land prices have tripled since then, both because of rising oil and because of increased security in the region. But since the Dubai deal, they have turned over and started down again, big time. So we missed the opportunity for that one.
Terry Keenan: Wayne, do you think the president is going to get the Europeans to pitch in?
Wayne Rogers, Wayne Rogers & Company: No, why should they? I mean, they didn't pitch in on anything else, why should they pitch in now? When Rumsfeld said it is ‘old Europe', he was right. They resented it, but he was right. There is a chance to pay for all of this. They have got enough oil within Iraq to pay for it, just have to manage it; it is as simple as that.
Dagen McDowell, FOX Business News: Wayne if we can focus, as a nation, on getting rid of the insurgency and reducing the attacks on the pipelines; if Iraq could get its oil production up by half a million barrels a day, that is $12 or $13 billion every year, so what do they need the rest of the world's money for if they have that kind of cash?
Wayne Rogers: You are exactly right.
Terry Keenan: And, Jonathan, that's the 13 billion that we are putting our hand out for to try and get from the Europeans.
Jonathan Hoenig, Capitalistpig Asset Management: If the issue is protecting Americans, I don't see why we need Europeans. That is what an army is supposed to do: protect Americans. The problem is that the war has changed. Soldiers are not good will ambassadors and I don't see the purpose in spending billions of dollars buildings schools and handing out lollipops to Iraqi kids. That is not the purpose of going to war.
Jonas Max Ferris, MAXfunds.com: First of all, what we've done in Iraq actually does protect the world, which is one reason why the world should pay for it like they did with Gulf War I. But the real issue here is that I kind of disagree that they are not paying for it. They regime that we unseated owed all of these countries a couple of hundred millions of dollars. They are going to see maybe 10-20 percent of that. So Saudi Arabia, Russia; they are never going to get this money.
Stuart Varney: But John made a very good point. And that is that it is the Gulf oil states, which have done incredibly well in the last three years, since American invaded Iraq. They have money coming out the ‘wazoo'. They are the ones who should be putting some money into this.
John Rutledge: There has been $500 billion of market cap created in those markets and more than double that in land values. Absolutely, they can do it, but we have to actually talk with them in order for that to happen.
Stuart Varney: Our presence there is giving them security. They should pay for it.
John Rutledge: And there are businesses all around the Arab world that have started operations in Iraq already.
Dagen McDowell: But those Middle Eastern nations know the value of the oil in Iraq. That is why they want Iraq's oil infrastructure to improve.
Terry Keenan: Why? That would just push down the price of the oil that they sell.
Dagen McDowell: A little bit, but not a lot, with demand going through the roof like it is.
John Rutledge: The only thing that matters for an oil producer is whether you are still in place to collect the money, ten years from now. Security is the whole determinant of asset prices.
Jonathan Hoenig: But John, security of the Iraqi people or security of American citizens? I mean, where are our military's interests?
John Rutledge: I'm not a fan of what is going on in Iraq; I don't think that we are solving any great problems. The big problem there is too much money under the ground and not enough strength to defend it, not from the other Iraqis, but from the other powers in the rest of the world. This place is not going to break out in peace tomorrow.
Terry Keenan: And Wayne before we go to the Europeans or even the Arab states that surround Iraq, don't we have to go to the Iraqi people and get them to step up here?
Wayne Rogers: Well, that's what I'm saying. With all due respect to what Stuart is saying, yes, morally, you are right. It should happen, but it is not going to. They are not going to do something that is not selfishly in their best interests. So you have to point out what is their selfish best interest? Their selfish best interest is to make sure the oil flows and that it will pay for all the rebuilding in Iraq that you want. And if that is what you are trying to do, I agree with you, I'm not for this policy of making the world safe for democracy, I'm here to help Americans, but at the same token, if that is what is going to make that economy work, that's what needs to be done.
Stuart Varney: But I would maintain that it is in the interest of the Gulf oil states to ante up and pay for this and create more security in that region. It is in their interest to do that.
Terry Keenan: And it is also, John, in the European countries' interest. They were huge trading partners with Iraq. Jonas points out they were left holding a lot of debt, but a vibrant market in Iraq would help Germany and the French economy a lot, wouldn't it?
John Rutledge: Absolutely. They are a lot more focused on making money than by being world police. The Germans and the French were big sellers into Iraq, just like they are today.
Stuart Varney: Continental Europe is finished. They have a neo-socialistic economy, a shrinking population, and an aging population. No moral fiber background whatsoever. Western Europe is dead and dying. That's the way it is.
Terry Keenan: You don't think there are a lot of Iraqis out there that are going to want to drive BMWs some day?
Stuart Varney: That doesn't seem to have helped Germany so far. An 11 percent unemployment rate, neo-recession… Exporters are doing very well, but the domestic economy is flat, in recession, and hopeless.
Housing Cra$h Myth?
Terry Keenan: The housing market is still the buzz and most of the talk is about a crash that has never happened. So is the crash just a myth or just a matter of time?
Frank McKinney, author of "Maverick Approach to Real Estate Success": Terry, as you said, it has never happened. You're going to see a ‘plateau-ing' of the real estate values across the country – very hard to imagine that we're going to keep 15 percent year-over-year property value appreciation. But I think it's important to delineate a crash in the stock market versus a correction or ‘plateau-ing' in the real estate market. When you see over the last 30 years, 6.4 percent year-over-year property value appreciation, I see it and the last three years we've been at 15 percent, in some markets where I live here in Florida I've seen 25 percent, because we will likely see high single digits next year across the country, when Microsoft (MSFT) goes down in a corrective mode, that happens in New York, Boston, Tokyo and here in Miami. Real estate is different. Geographically you are going to see some slowing down and maybe some devaluation, but you're not going to see this crash.
Terry Keenan: But in 1999 in the stock market, you could give out these great 20-year annual returns for the stock market too, and it has been dead money ever since.
Stuart Varney: There is one area of the real estate market that is in for a very serious price decline. That is what I call the new mansions. 5,000 square feet for $1 million and up. These places are going to come down 20 to 30 percent in value and price, but that is the only area.
Dagen McDowell: It's not just new mansions, old mansions, new condos, new apartment, old apartments. There are so many properties overvalued.
Jonathan Hoenig: Well I think Frank is underestimating the real fear here, that I have, at least in real estate. In my hedge fund, we used to own all of these securities. All those stocks are so weak right now. Even the NASDAQ crash took two years to occur, so I don't see an overnight adjustment of 50 percent downward but I just don't think you want to be highly leveraged in real estate right now.
Frank McKinney: I will concur with your statement on being highly leverage. These creative mortgage products -- 30-year, 40-year, 50-year mortgages, and negative-end mortgages – you're going to see a long list of defaults in those. And as a real estate investor, that's a great opportunity over the next two or three years. The speculators that have come in thinking they could buy these things and flip them from contract to contract prop up a lot of condo markets. That's the problem area. I have a large stock portfolio, I'm not just a real estate guy. I went back and did some research back to 1992 and our real estate portfolio performed at 22 percent year-over-year since 1992 and our stocks are going down about 4.6 percent.
Terry Keenan: Wayne, would you suggest people buy a single-family home right now?
Wayne Rogers: Well, I think you are going to see a better price for that same single-family home somewhere here in the next year. Another item that you forget about, a lot of people do, is insurance rates. On certain coastal areas, you can't even get insurance now on homes. The cost of carrying that home is becoming enormous. With negative mortgages and all those kinds of things, and people who are flipping and got into the market, you are going to have a shakeout, yes. A crash? No. but a shakeout? Yes.
Terry Keenan: John do people still sleep well at night saying, ‘the prices in my neighborhood haven't really gone down yet.' Is that just a matter of time?
John Rutledge: That's ‘yet.' You know, real estate markets don't pop. They just deflate like a balloon and it takes years to do that. Frank's ‘92 number is interesting because 1992 was the bottom of the last crash and I have lived through three of these things. The stock market has outperformed the real estate market by 6 to 1 between 1981 and 2000 and still 6-1 today. Real estate markets are priced off the bond market. If bond yields are 5 percent instead of 4 percent, that will support a 20 percent lower housing price. So I think you are going to go down. Not in an exciting way. Prohibition is bad, but it's better than no whiskey at all.
Dagen McDowell: Don't discount the psychology of this housing market. So much of what has boosted it, particularly in the last couple of years, is the psychology of ‘how much money I can make in my house'. And once you start looking across the street and once you start seeing the prices come down for your neighbor's house, it could feet on itself.
Stuart Varney: I'm a real estate investor. I got out at the end of 2005. I am not going back in.
Terry Keenan: What would make you go back in?
Stuart Varney: I have to see prices come down.
Jonathan Hoenig: Stuart, you rent an apartment, month after month? You pay a couple grand in rent every month?
Stuart Varney: No, no, no. I'm just talking as a real estate investor. Ok, I was out at the end of 2005, I am not back in again and I don't expect to be back in again until next year, maybe.
Dagen McDowell: Well, those rent-to-own calculators that you can find on the Internet always make owning look better because you can't put in there that your real estate investment would ever go down, so those are hooey.
Terry Keenan: Frank, would you be buying new real estate right now?
Frank McKinney: I will tell you that it has been a sellers market for three years. And Stuart, this will be, because of the some of these highly leveraged ways to get into real estate, a buyers market for the first time in the next year or two.
Stuart Varney: Not yet, not yet.
Best Bets: Hole-In-One Pick$!
Swing into the green with our hole-in-one picks! Our guests are teeing up with the stocks that could make you a bundle.
Wayne's Hole-in-One Pick: Johnson & Johnson (JNJ)
Friday's close: $61.68
52-wk High: $66.80
52-wk Low: $56.70
YTD Return: +3.9 percent
Wayne Rogers: My pick is Johnson & Johnson. The stock has made a turnaround and I think the chart looks great. If you are going to go into that industry, you stay away from Merck (MRK) and Pfizer (PFE). Johnson & Johnson is going to be a winner.
Terry Keenan: It has been flat but it held up great during the recent market turmoil, is it time to step back in?
John Rutledge: I love Q-Tips and it is a time when the Fed is really driving the markets. It's a great defensive buy and I think health care stocks have been really under-priced in this run-up of commodities in the last couple of years, so I like that.
Terry Keenan: And this one is always well managed.
Jonas' Hole-in-One Pick: Bridgeway Blue-Chip 35 (BRLIX)
Minimum Investment: $2,000
Jonas Max Ferris: I like the Bridgeway Blue-Chip 35 Index Fund. If you're looking for giant-cap stocks that have recently been doing a lot better than the rest of the speculative parts of the market, this is the fund to get. A fund like this has only fallen about 5 percent. Most areas of market are down more than that, especially small-cap foreign markets. So this is a defensive place, like JNJ to be in. It's diversified, a very low fee fund, great place to be in this kind of environment.
Terry Keenan: But it is a market play and we have had a really tough market, despite the rally in the last couple of days. Would you be jumping into this now?
John Rutledge: I think it is really the defensive story that we were talking about. And if you want to hide from the big drop in the small cap stocks and the emerging market stocks, it is a good place to do it, but your are still exposed to China and some of these large companies and China is a story right now.
John's Hole-in-One Pick: iShares Russell 2000 (IWM)
Friday's close: $68.93
52-wk High: $78.02
52-wk Low: $61.05
YTD Return: +3.3 percent
John Rutledge: I like to take the risk and I want to jump right back in the eye of the hurricane because the small cap stocks have been killed in the last month. And I like an exchange traded fund, IWM. It gives you the Russell 2000 small caps. It's dropped more than 20 percent. It might drop a little bit more, but if that thing gets down near $65, it's a great, great buy.
Terry Keenan: So you're a real bull in this market. Wayne, would you be jumping into the eye of the storm?
Wayne Rogers: I'm just not that smart. It's a market momentum stock. You are betting on the fact that this is going to turn around. Until it makes some kind of a bottom with a base to it, I just can't do it.
Terry Keenan: So you are not convinced by this last week's turn around?
Wayne Rogers: No, definitely not.
Jonas Max Ferris: I think these small cap stocks are overpriced. They are going to keep falling. I don't think you want to be in this. Especially now with them finally cracking.
Question: "Is the thought of a big hurricane season helping to keep gas prices high?"
Jonas Max Ferris: The gas markets are pricing in everything: Iraq, the future, everything. But they are not pricing a year like last year because that was like a once in a generation type of storm. They are pricing what the government said we are going to have, which is an 80 percent chance of a slightly above average hurricane season, which means slightly reduced gas supplies. But nothing along the lines of what happened last year. If that happens again, you are going to see gas prices skyrocket. If it's a normal season, they will stay where they are.
Terry Keenan: The problem last year is that a lot of the pipelines and refineries were shut down. Is that priced in?
Dagen McDowell: It is. You are going to see prices where they are, like Jonas said, or even higher, but the production in the Gulf has just kind of gotten back to normal in recent months. Refinery capacity is finally picking up, but everybody is so nervous about the hurricane season, even though it is not expected to be like the last one, it is going to be through September before you really get prices cooling off.
Terry Keenan: Wayne, are you nervous?
Wayne Rogers: Yes I am nervous, because as I said earlier, it's not just gas prices but insurance, which you can't even get on the Gulf Coast. Gas prices are going to be threatened by this at any time you have the threat of a hurricane and everybody should be frightened about it because it is a real thing and I just hope Jonas is a meteorologist and he is right.
Jonathan Hoenig: Well, I'm not a meteorologist. I can't predict hurricanes; I can barely predict the stock market. I'm not exactly ‘Janice Dean, the Weather Machine' over here. The stock market is not indicating that we are going to see higher commodity prices.
Terry Keenan: Because of the way gas stocks have been trading?
Jonathan Hoenig: To me, the story is out on energy.