tv Closing Bell CNBC August 28, 2009 4:00pm-5:00pm EDT
bob pisani down on the floor of the new york stock exchange. we're still settling out but it looks mostly flat on the week. dow jones industrial average up about 0.3%. s&p about the same. nasdaq just a little bit of outperformance here. still trying to settle out. but again, intel, great news. increase in revenue, increase in top line. that's what everybody's been arguing for, everybody's been wanting and yet the market outside of the semiconductors that had a good day kind of yawned about it. a lot of the traders felt this is what people were expecting, modestly improved sales were already priced into the stocks. you get it both ways, if the market would have gone up you would have said that's what we wanted to hear, market goes sideways, kind of yawns about it and says it's already priced in. some traders have an explanation no matter what you do, folks. i know it's a little bit annoying sometimes. here's what's important. churning around on very light volume is not a sign of much of anything. everybody's worried that the rally is running out of steam, doesn't know how to look at the market proper plip you can't mac a lot of conclusions about this
week's trading. you just will have to be patient and wait for a little more conviction on the part traders. one of the themes we'll we've been talking about today is the concept of rotation, that perhaps those underperforming stocks that scott cohn was just talking about, the pharmaceuticals on top of some consumer stocks, on top of some stocks like communication stocks, the at&ts and the verizons of the world, might start coming to the fore in the month of september. not because the market is fearful of the dramatic downturn in the economy but because potentially these stocks need to move up as well as the overall economy and the overall market moves up. there's the final bell for the week. thank you. i always get that right. we're going to be up right next with melissa francis. and wall street ends the week at 4:00 p.m. eastern time. do you know where your money is? there's a little bit of a down side bias on "the closing bell" today.
i'm sue herera filling in for my colleague maria bartiromo. i'm here at cnbc global headquarters. here's what we're following at the close. the recent stock market rally did run out of a little bit of steam today after mixed reports on the health of the kurnlgs or it could be that rotation that bob just mentioned. consumer spending rising .2% in july. consumer sentiment falling to a four-month low in august on concerns about the job market. tech, however, one of the day's bright spots after intel raised its third quarter revenue guidance because of stronger demand. so here's a look at how things are settling out on this day on wall street. the dow jones industrial average down 35 points at 9,545.48. nasdaq is down -- is up, rather, about one point, trying to hold on to the green at 2,028.77. and the s&p 500 down just about 2 points on the trading session. let's rejoin bob pisani. he's our eye on the floor of the new york stock exchange. and i think he made a very interesting point, bob, about the rally not necessarily running out of steam but it might be that rotation into stocks that hadn't participated yet. >> and i think that's really the
big argument that's trying to be made, although there's not a lot of evidence that it's happening yet. let's take a look at what happens. and folks, on a relatively flat week the big debate is what's going to happen two weeks from now when you really start getting some volume back at the new york stock exchange. and all another exchanges as well. august and september are traditionally weak, but everybody has agreed they were all wrong. so far august is up 4% here. the s&p 500, we are essentially poised for a major breakout here. we just need another five or six points and boom, we're there into new territory. the bulls and the bears have wanted a correction for the entire month. the xwulz to show that they can buy stocks at a lower point. the bears to feel a little more vindicated. but we're still, many bulls still want the markets lower to wait for a better entry point here. september, the argument has been, may not be the time to go long, it may be the time to trade around the market. so you've seen the big names so far this year. your techs like ibm and cisco and your financials like bank of america and your materials like dupont and your industrials have had a great time of it, but what a disparity, what i abifurcation
in the market because when you look at the other big sectors out there there have been huge laggards in the consumer staples group, in the health care group, and in the energy group, which is perhaps one of the biggest surprises of all. exxon's down 10% 1:001%. so is chevron here. can any of these stocks start coming to the fore if you get some decent move up in the market and bigger players have to come in by larger parts of the market? there's the s&p, 1,026 last friday, 11,0today 1,028. small gain for the week. citigroup also traded over a billion shares. the retailers, j. crew still on fire. mickey drexler having another great year. of course with the help of michelle obama. they reported earnings expectations. also raised their guidance a little bit. also did tiffany. nice day for them. up 11%. dow jones industrial average up 0.3%. still settling out. s&p 500 also fractionally to the up side. sue, back to you. >> thank you very much, bob.
have a great weekend. >> you too. >> intel, we just saw that stock chart. it raise the its third quarter revenue guidance because of stronger than expected demand. cnbc silicon valley bureau chief jim goldman has the details. and i was really surprised at how frank and optimistic they were about this, jim. >> yeah, indeed. you're not alone, sue. nice special treat talking to you so late in the afternoon. >> me too. >> happy friday to you. yeah, this is fun. this is one of the stories that drove the early market, and then of course that tech rally did begin to fade some, but not for intel, which as we can see by this chart is definitely holding its own. also not for dell either, which really began the ball rolling last night with better than expected sxailz profits of its own. but some analysts say intel's news is the kind of nugget that may come up again in the weeks to come as a leading indicator of what may be a broader te turnaround whether the tech rally held today or not. intel has seen increased consumer confidence and not just for low-end netbooks but more expensive higher margin devices that will be rung its new
nehalem microprocessor. intel's momentum only seems to be accelerating following the kps earnings last month when i spoke with intel's ceo stacy smith. >> our second quarter results and the outlook we set for q3 i think just reinforce the view we had a quarter ago, which is we saw the computing markets bottoming in the first quarter, we saw improvement in the second quarter and we expect it seasonally up second half. >> it's a message that dell delivered last night as well, that tech is indeed turning round. we got a mixed bag of stock prices today. longer term, meaning through the end of this year and into 2010, turnaround trends, they are certainly afoot, with intel's news today not the only but merely the latest sign post for tech investors. sue, have a good weekend. >> thanks. you too, jim. appreciate it. we're joined by thomas lee, chief u.s. equity strategist at jpmorgan. welcome, tom, nice to have you here. your technical strategist made a call that says we're probably
going to be on the s&p 500 at 1,043 by labor day. so that means we probably have a couple more weeks of up side potential here. but at this point are you aat all worried about that eight-day winning streak in the markets overall and the fact some people think we need to take a bit of a rest? >> i think it's a fair point, that markets don't rise every day. so we can have upticks continuously. i would say when i speak to investors most have really expressed concerns about not only into labor did i but over september, october. i think consensus is actually a lot more bearish than what you can tell by looking at a tape. >> okay. let's bring in david darst and talk more about this. he's chief investment strategist at morgan stanley smith barney. welcome, david. good to see you. >> so good to see you. and happy week leading up to labor day. >> exactly. those can be very bullish times or dangerous times, depending on how thinly traded the market is.
are you as bullish on equities as some of the other analysts we talked to? >> we say buy risk assets. there's abundant liquidity. there's up earnings, up gdp growth. okay? and the valuations are not bad. so maybe 14 times 2010 earnings for the s&p 500. risk assets, commodities, high yield bonds, small cap equities, emerging market equities, and real estate investment trusts. in addition, if you want to take on some risk in advance of -- you'll have sunday's election in japan. so you might want to start to add to your japanese position. and there's reasoning behind that if you want to go into it further. >> wellish let's get some opinions back from tom. tom, where would you be allocating cash right now if indeed the projections that your firm is putting out are true at this point? would you be looking at basic materials? would you be looking overseas? or would you be looking more at small caps here in the united states? >> well, i think what's going to be very different about
september, october this year, because people are worried about a correction, is i think you're going to see a lot of positive preannouncements. we're taking a hard look at these estimates. and analysts are way too pessimistic about q3 versus q2. but the up side is really going to be in the smoke stack. so it's the basic materials. it's the technology. you know, intel's a great example. and hp as well. it's going to be also the industrials. i think we're going to maybe start to be a little surprised on what the energy companies report as well. so it's really very cyclical. i think the sell-off today, what's interesting is it was really the health care and the defensive selling off that dragged down the market. it wasn't the cyclicals. >> you're underweight on health care, and that's in contrast to any number of analysts that i've interviewed over the past couple of weeks. it seems like everybody, tom-s saying be long health care despite what's going on in washington right now. why are you underweight that particular sector? >> you know, longer term i do think health care spending is too large a percentage of gdp. so that's a structural issue.
but what i find is investors are buying health care because they want to buy a good balance sheet, you know, defensive group. when you look at the message coming from credit, you really want to buy companies that have -- that are going to benefit from restructuring balance sheets. so in some ways the real story investors should focus on are small cap, bad balance sheet, and very, very smoke stack cyclicals. >> david, you piqued my interest. with sunday's election, we talked to a gentleman the other day who said yes, there's going to be a big change, but that's already factored into the markets, and japan's markets don't always respond to the political factors. do you disagree with that? >> well, so no question about it. they expect the democratic party of japan to beat the ldp in sunday's election. expect that they'll do more in terms of their relations with asia. that'll help their exports. expect them to do some things to stimulate the consumer and also, very importantly, sue, to reduce the bureaucratic influence and their position in japan.
tremendous government bureaucracy. don't forget, sue, japan is still very cheap. it's up 18% year to date in yen terms, but it's only up about 10% in dollar terms. japan sells for 0.5 times sales. the u.s. sells for.75 times sales. japan sells for 1.3 times book. the u.s. sells for 2.0 times book. and lastly very importantly earnings in the united states are supposed to grow 33% next year. in japan the consensus is for 65% earnings growth in 2010. so we like japan and we would be adding here. >> thank you both. appreciate it very much. >> thanks. >> the "wall street journal" reports an overwhelming majority of investors in cerberus's hedge fund want out of that fund's core fund. this after cerberus tried to convince them to move assets to a new fund with lower rates but a longer asset lockup period. for more we're joined on the phone by vince farrel, the chief
investment officer at soleil securities, also a cnbc contributor. vince, i was kind of stunned by the headline. 71% of investors in these two core funds want out. despite the offer of lower fees. what does that tell you? >> colossal failure of public relations, sue. not only a failure on the investment side, because they made such concentrated and huge bets in the auto sector. you might be able to survive that because the investment scenario has been so difficult for so many. but cerberus has been very secretive. very aloof. and very uncommunicative. and to have 71% of your investors at first chance say we're out of here shows you've mishandled it at every stage possible. >> do you anticipate any market disruption? because these markets hit late in the afternoon on a friday. a lot of people are on vacation. they're going to wake up tomorrow and monday reading about this. and some of these assets were illiquid, as i understand they
have to go into a special fund to be unwound in an orderly fashion. but what about any market, overall market reaction on monday morning? >> i don't think it helps the market. you know, doug e. kass, our great friend, called for the market as seeing its high in a letter earlier this week. i've been looking for a correction for a while. so if you're of the mind there should be a correction in the marketplace, this is only going to help reinforce that. but i don't think there's any real direct market impact by this. it's more on the private investment side that this is such a disaster. i think it does emphasize that the rules are going to have to change for hedge funds and private equity firms that were riding high for so long, saying that we're going to charge high fees, we're going to have big lockup periods, and just going to do it it our way. well, the returns aren't there and now they're going to have to eat humble pie for some number of years going forward. >> you pointed out there wasn't a lot of hand holding on
cerberus's part with investors. but you pointed to lee cooperman's omega advisers as perhaps one of the models that should be adopted by more hedge funds as investors reevaluate whether or not to keep their money with them. >> i think the world of cooperman, what he has always said is if you don't want your money with me take it back, i'll give it back to you at any time. he's been very open and very candid about what his investment philosophy has been and why he's doing whatever he's doing. i don't get them directly, but people i know that get his investment letters say they're a model of disclosure. whereas cerberus has been the exact opposite. you can't get your money back, and we're smarter than you are, so we're going to tell you at the end of the day what we've done. well, at the end of the day it was a disaster. and to have 71% of the investors walk is symptomatic of that. the really good private equity funds and the hedge funds say yeah, we need a lockup period because we invest in some long-term assets and not necessarily easy to turn around. but here's what we're doing, here's why we're doing it.
and there's periodic times when you can take your money back, if you want it you have it. people stay with you for the tough times. when people abandon you for the tough times it means you've mishandled your firm. >> vince, thank you very much. we appreciate it. have a good weekend. we'll be talking to you next week about this, i'm sure. a million and a half americans are on the verge of losing their unemployment benefits. so should congress act quickly to extend those benefits to help the economic recovery or will the cost outweigh the benefits? then we'll give you the names of five stocks undervalued even after the big market run-up over the past six months. you're watching cnbc, first in business worldwide.
unemployment. the commerce department, meanwhile, reporting consumer spending rose .2% in july thanks to the cash for clunkers program. and apple's iphone is heading to china. after months of speculation apple has reached a three-year deal with china's second largest mobile carrier, unicom, which is expected to begin selling that phone in the fourth quarter. and we mentioned unemployment. well, the number of jobless americans on the verge of losing their unemployment insurance could be on the cusp of skyrocketing. the national employment lobby predicts estimates of 1 1/2 million americans that might lose that lifeline by the year's end. is it an unforeseen wave threatening to derail the economic recovery or not? james schret is with the heritage foundation. and greg valliere is chief policy strategist with soleil
securities. he's also, as you know, a cnbc contributor. welcome, gentlemen. good to see you both. we have been talking aw lot about turning the corner, whether you're talking about the economy as pertains to housing or the consumer or whatever. so do you feel that it is essential to extend these ñ unemployment benefits to keep ñ the economy in recovery mode?ñ >> no, it's not.ñ if you're in a state with high ñ unemployment, you qualify for a year and a half of unemployment insurance payments. and this proposal would take that to a year and nine months. well, a year and a half is more than enough time. and you have to understand the government doesn't have any money of its own, everything it gets it takes from someone else somewhere else in the economy. we've got a problem right now of the government running horrendous deficits. we're going to need to pay that off or we're looking at either ridiculous interest rates or strong inflation just around the corner. the government, we shouldn't be racking up any more debt. >> but greg, a lot of people are telling us that a year and a half is not enough time because new jobs are not being created, we're continuing to lose jobs,
as a matter of fact. so what is the congress to do? >> well, i'll tell you, sue, in listening to james, he said a year and a half is more than enough time. well, try telling that to somebody in michigan or ohio. they may not think that is enough time. he also said something that i think is not factually accurate, and that is these deficits are going to drive interest rates higher. there's no correlation. in fact, this week with appallingly bad long-term news on the deficit interest rates fell. so i don't see a correlation between red ink and interest rates. >> james, you want to respond to that? we did see the short end of the yield curve and indeed the intermediate part of the yield curve go down sharply this week. so interest rates have been moving lower, not higher, even with the deficit figures which were records released earlier ñ this week. >> so far. but no one really has experienced with the kind of deficits we're talking about racking up. almost 1 of every $2 we're spending on the government right now. to say you can continue to borrow and borrow and borrow
that money and not see a payday around the future is -- that's a stretch. >> but james, you could argue that no one has experience with the type of economic contraction, market event that we've had, unemployment that we've had, other than the great depression. so doesn't that argue for extending unemployment benefits to drum up as much economic activity as possible and continue spending on some level, even if it's low by the consumer? >> well, again, remember what you're doing, though. you're taking money from one part of the economy and moving it to somewhere else. if you want to extend these, we shouldn't be continuing to rack up debt. what the congress should do if it's going to extend it then is cut some of the other wasteful spending we have or spend some of the unspent stimulus dollars since the stimulus hasn't worked terribly well. or say the money we waste on agribusiness subsidies and ethanol, take money from some of these other wasteful government programs but don't continue to rack up new debt. we're already spending well beyond our means right now.
we can't afford to do more of this. >> so greg-f they do -- as i understand, it you think the congress will extend the benefits but they won't do it in a stand-alone fashion, there will be other components to it, is that correct? if so, what are they? >> i think this is a slam dunk, sue, this file. i think congress will do it. maybe next year this will be a really interesting debate. maybe as the economy gets better we will cut off these benefits. but this fall i think is a done deal. urban only is it a done deal, they're talking about what they're going to add to the bill. are there going to be other stimulus provisions with unemployment benefits being the vehicle for a little bit more spending. >> and would you like to see that? and if so, a lot of people are talking about the operating loss carryback component. which might be very helpful to businesses. but would you be in favor of that? >> one thing i'm agnostic in terms of whether i favor it or not but we're telling our clients this could wind up on a bill in fall. a little stimulus called net operating loss carryback.
companies who have losses now can only go back two years. this profession would allow them to go back five years. so home builders, banks, a lot of companies that haven't done well lately could get a little something in this package to extend unemployment. >> what do you think about that, james? would that make it more palatable or less palatable to ñ you? >> i think again, what we need to be doing is not continuing to spend at this unsustainable ñ rate -- >> i got that message. >> yeah, but -- >> you know at some point -- >> it's not going to have a major effect. either way, it's -- the total amount of spending you're looking at with that, you're certainly going to appreciate it if you're on the receiving end, but it's not enough that it's anything we're going to see in the national statistics or in the aggregate. >> james, would you favor a different formula for xutding unemployment benefits? in other words-f you do have family members who are working it would change the ratio at which you get paid your ñ unemployment benefits or not?ñ >> well, that's the problem with
using the unemployment insurance system the way we're doing now.ñ it's an unemployment insurance ñ system.ñ it was never meant to be a welfare program or something toñ sustain people through a year and a half or a year and nine ñ months. so if you've got a two-income family and one person's still working and say they're earning a six-figure salary but another one got laid off, they're going to collect the same unemploymenñ benefits as if it was a ñ one-income family and the primary bread winner was laid ñ off.ñ so there's no targeting needs iñ these programs, which is why they're a poor vehicle. we've got other social safety net programs to try to do that. it's not a very good vehicle. >> greg, you get the final word. >> i always go back tie truism and that is the main objective of members of congress is to get re-elected. and i think since that is a truism i think they will pass a further extension of these benefits. >> can we at least agree on that part, james? >> oh, yes. >> okay. we'll leave it there. thanks, gentlemen.
that marks the official end of summer for families who might have been looking to move before school starts. so let's take a look at how the historically busy real estate season fared. take a look at the four months running from april through july. existing home sales rose steadily and if you look at the four-month running average it's up 5 1/2% from the previous four months. so good solid progress. compare that to the spring-summer season last year, which saw no sales bump at all from winter to spring. now prices. prices rose month to month from april to july except june to july. but it's much more precise to look year over year since prices are seasonal. the four-month average price is down 16% from the same four months of 2008. now, let's look ahead, shall we, to what could affect housing this fall. number one is the expiration of the first-time home buyer tax credit. that removes $8,000 worth of buying power. but there is a big push to extend it. second is rising foreclosures and finally rising mortgage rates and still tight lending standards.
>> the pendulum has swung and swung too far from the way too easy excess credit and lax underwriting of the last five years to overunderwriting right now. that's particularly true for the move up buyer. we don't have the move up buyer right now. we're not going to have full stability in the housing market unless people who are in a home are looking and can find a way to buy the next home up. those folks can't get credit right now. >> now, granted, these are all the negatives. on the plus side we do have excellent affordability and slightly better consumer confidence in housing. so going forward, the question is how much will that weigh against the negative. sue? >> thank you so much, diana. have a great weekend. >> you too. >> despite the recent market rally there are still some good values out there. that's what we're hearing. and our next guests each have five cheap stocks you need to know about. find out what they are when "the closing bell" returns. i'm racing cross country in this small sidecar,
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the hunt for value stocks has gotten a bit more difficult with the tremendous run the markets have had since earlier this year. let's take a look at how you can determine what's a good value and in some examples perhaps of what might fit into that category. roger us inbaum is chief investment officer with your source financial. and scott barbie is portfolio manager with the diaz value fund. welcome, guys, nice to have you here. >> thank you. >> scott, i guess one of the questions we pose all the time is what do you determine is cheap and how do you determine something is, quote unquote, cheap? >> well, at the aegis value fund we look at companies cheap on assets. so we're looking for sort of unlevered discount to book va e value, kind of looking at what
you have minus what you owe and when we can buy that cheaply in the market that's when we get interested. >> good lornlg, what's your chief determinant? >> well, after a 50% rally it gets much tougher to find real value stocks. i think it takes in this environment where we've gone up so much a willingness to kind of put on several different value hats in order to find some names. >> give me an example of what you would have to do. what are some of the different hats? is p/e one of the main components that you would value in? and if so what else? >> p/e is certainly one. also yield. one way to look at p/e can be as opposed to just nominally speaking is it a low p/e ratio but in looking for names where the p/e ratio maybe is lower than where it's historically been. this is pretty easily available. and if something is trading at 15 or 16 times earnings nomin nominally that might seem a little expensive but if it spent most of the bull market up in the 20s then 15 or 16 maybe is a pretty good place to look.
>> scott, let's talk about what's on your list. you gave us a few stocks that people might want to consider and add to their portfolio. alliance one is one of the companies that you're looking at right now. why? >> yeah, alliance one is a tobacco leaf dealer. and they're trading a little less than $4 a share. we think their normalized earnings power going forward is going to be somewhere in excess of 80 cents a share per year. so it's trading very close to, you know, four times earnings. and while, you know, i think your investors will see a lot of debt on the balance sheet, a lot of that debt is to full tobacco inventories that have already been committed to the tobacco manufacturers. >> so that's more acceptable debt than other types? >> that's -- there's less business risk associated with that debt, which makes us more willing to hold that security. >> pma capital is on the list. allied defense is on the list. and american pacific. anything in common that those stocks all have? >> well, allied defense and american pacific are two tiny microcaps that are in defense
contracting. allied defense makes ammunition. they've had their first profitable quarter. it's in the mid single-digit p/e ratio. american pacific, future earnings about 80 cents. we think, you know, it's trading in the 7 to 8 range. both under tangible book and both, you know, fairly, fairly cheap and fairly stable businesses. >> roger, what's on your list, and what would you be putting cash into at this point given the run-up that we've seen in the market? >> well, the names to talk about today kind of all have different things going for them. one i think is interesting is man toe wok, it's the big crane maker. they also are in the food business. the stock is down 80%, revenue and earnings have plummeted. similar to a lot of financials in that it is down a ton and things -- >> like charles schwab, which is also on your list. >> sure. charles schwab has a very large amount of cash. they've really been untouched by
the financial crisis in terms of truly fundamentally touched. the suit by cuomo notwithstanding, which i think will be a small problem if it's any problem at all. and given the cash loads is really just a small rounding error. i would throw in alexander and baldwin. it's kind of a quirky little conglomerate. they've got some cyclical businesses like their container business. also container ships. non-cyclical. they've got a food business where they produce sugar and molasses. so it's kind of a combination of company. >> roger, if i could ask you, i know you're not an expert in these particular companies, but it's just striking the volume and the run-up on a percentage basis that we've seen in the likes of aig, fannie mae, freddie mac, and a lot of viewers are telling us they're moving into these stocks because they are, quote unquote, cheap. the other side of that is it's the mother of all short squeezes. i mean, how do you view these two stocks in terms of just what's happened technically to them? >> well, anyone who's been around a while has seen this
exact type of behavior quite a few times before. i remember in the mid '90s compareitor stickers, was a wildly popular stock there, was no business there, and it turned out to go bust. in looking here it comes up again. people love to speculate. and you know, despite there being no fundamental underpinnings, and really there aren't any, but despite that people are making money on the tradings. and for folks that are nimble enough, that want to play that game, and really it is a game, they're not even call options, they're more speculative than that, by all means as a trading vehicle. if you can stay at the computer, stomach the volatility, you know, go for it. not my trade. it's not something i'm going to put my money into or my client money into because there is no fundamental underpinning. but to be sure the trading and the fever is going to continue for a while longer. >> right. and scott, a lot of people are also telling us that when this does end in those stocks, i mean, we're getting two sides of the coin, one group of analysts are saying this is going to end
and it's not going to be pretty because the big guys are going to take the money off the table sxefsh's going to head for the exits. and others are saying, hey, aig is 80% owned by the u.s. government, that's enough for me, and we talked to one analyst on "power lunch" yesterday, had a $100 price target on the stock. what do you think? >> well, a lot of times these financials are very highly levered and the asset quality is really difficult to get your arms around. so for us we haven't been focused on calls like that. it's sort of up in the air in terms of they can be zeros or they can be really very, very profitable if they work out well. but we focus on unlevered discount to book, and so we're a little more focused on companies that have less leverage. >> all right. gentlemen, thank you. >> thank you. >> didn't mean to take a right turn on you there, but you know, with a 50% gain in the stock like that, we had to ask since we were talking about value. thanks very much. you're good sports. coming up next, we'll discuss
whether all the stimulus spending is actually helping the economy or is it driving up the deficit too far. we're back in a moment with more on that. i'm jim goldman in the silicon valley. this is "tech check." >> go home. >> geeks rejoice. the force is headed your way. a unique "star wars" stadium show coming to the silicon valley. massive stadium screen, a live orchestra, playing the famous john williams music and anthony daniels, otherwise known as c-3po, serves as the evening's emcee and narrator. playing to sold-out audiences in a few venues already, business should boom when it gets here. console wars. this is the new sony playstation slim. a $100 price break, and sony says this will drive the video games market this holiday shopping season. not to be outdone, mieshlth slashes xbox 360 elite by 100
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the u.s. budget deficit is now expected to reach $9 trillion over the next decade. not everybody's worried, however. in an op-ed piece in today's "new york times," economist paul krugman says deficits are actually helping the economy right now but that the long-term outlook is indeed worrying. so let's join the debates on the state of the deficits. to do that is john herrmann, president of herrmann forecasting. and jeff myron, director of undergraduate economic studies at harvard university and senior fellow at the cato institute. welcome, gentlemen, nice to have you here. john, let me start with you. you do think that perhaps this was the appropriate way to stem the blood not only on wall street but on main street. >> i had an unusual -- economists at merrill, and i sat on the floor while we basically watched all these grenades go off all over the financial market. >> last september. >> last september. and it was just tremendous wounds being inflicted in
everything from commercial paper to repo to the municipal bond market to the credit market to every form of collateral. it was unbelievable. it led to the nastiest recession since 1948. >> so you can definitely tie that -- because some people are saying you can't tie that to the recession that's followed. >> no, we just basically shut down the avenues of credit throughout the economy, and without some kind of temporary boost there would be no way to get a loan. i did some numbers. we actually were on your show back in december. we ran some numbers, and we looked at things and said look, if we add up the negative wealth effect and add up the impact that it's going to inflict on the state and local governments, the impact on banks, and the impact on unemployment, we did the numbers and we added them up and it was around 1.3 trillion, and when we now add the obama stimulus with the tarp programs, with the aid to the gscs and with the little housing fix we basically come with the numbers around 1.3. so they're basically offsetting
at this point. >> jeff, why do you disagree with those out there who say the stimulus and the spending is the appropriate way and we've seen actually a turn in housing and a turn in the economy? to which do you attribute the recovery that seems to be taking hold in the economy? >> well, first of all, we had recessions long before there was keynesian economics, long before we had stimulus measures, long before we had monetary policy. before 1914. and all those recessions ended. and on average those recessions were no worse than the recessions we've seen since then. more generally the evidence that stimulative policies are effective at ending recessions is really quite weak overall, especially for fiscal policy. so we think that economies tend to recover on their own. there's lots of evidence that's consistent with that. >> right. >> so a lot of what we're just seeing is the natural return of economic activity -- >> okay. what about those who say it was different this time? i probably would argue it's different every time, you never get the same type of economic event repeating itself. however, where this economic
event hit, the credit markets, the housing market, that it did make it fundamentally different in terms of the remedy that should be applied. >> i don't see the reasoning behind that position. yes, there was a shock that was different than other shocks and other recessions. i agree with you. every recession has its own unique features. but a lot of that was readjustment that the u.s. economy needs. we had overinvested in housing in a huge way. we needed to stop building so many new houses. we needed to stop putting people into houses who couldn't afford them. the only way to do that was to have a recession. somebody was going to have to pay for that. it should have been the creditors of the wall street banks -- >> that's just a little bit on -- a little bit too extreme. so here's the thing. i mean, if you just look at the negative wealth effect and the impact that would have on the consumer, that was going to take out about $600 billion out of spending. that's very severe. right now we have money being injected back into the system. and still, even with that we're running 9.5% unemployment rate. and most likely if we just sat on the sidelines through this
we'd be looking at unemployment rates of somewhere between 13% and 15%. now, to sit there and say yes, we want to have all these adjustments take place, that's -- in an idealized world that sounds perfect. but the facts are we had too many adjustments going on at the same time. auto sector had to readjust. housing sector had to readjust. consumers had to deleverage. the state and local governments had gotten too big, have had to adjust. all these things. and if we're going to do every single adjustment at once, this economy would have -- we've been on our heels for years. this is just -- it was too much. >> jeff, does the systemic and global nature change the argument at all? you saw the fed take unprecedented moves and the treasury and administration. were those not appropriate? would you have done anything at all? >> i would have done at most a reductions in taxes as a stimulus measure because reductions in taxes we know have beneficial effects on the economy by improving incentives and reductions in taxes are
completely consistent with the keynesian framework. there's no reason that the stimulus couldn't have taken that form. but i also want to come back to one word that john used, which was "injection." what are we injecting? we didn't get more resources. we didn't get more wealth. we didn't get more things for consumers and businesses from nowhere. we're taking them from the future. we're borrowing from the future, and we're going to have to raise taxes later to pay for it. that's going to be very bad for the future -- >> hold on a second. last -- in the preceding year we had tax rebates around $95 billion. and of that $95 billion in tax rebates about 80% or a little more was saved. consumers are trying to ramp savings. so right now you cut these taxes and all consumers -- >> there are other kinds of taxes besides consumer rebates. there are permanent reductions in the corporate income tax. >> but the thing is if you just cut personal income taxes with this ramp in savings that's going on right now, you would have -- i think it would have been -- >> i didn't say it had to be
personal income taxes. >> he's saying corporate. >> it should have been corporate income taxes. that's a stupid tax system in the first place, and it would have directly affected businesses' incentives to build plants and equipment, to hire people, to continue to build more -- >> what about that? >> longer term i think this is great. short term i think right now with the consumers really retrenching, with the money that was needed at the state and local government level, this money that's being funneled now isn't really going for state spending as much as it's going to retaining existing programs, holding on to existing programs. so -- >> a lot of those programs are bad. a lot of those programs should be cut. >> but the thing is you can't cut every single program at exactly the same time. you can't cut the motor vehicle sector -- >> when do we get to the time we need to cut them? we never cutm in good times when there's money good times when there's money around, now you say not bad times either. >> we are cutting, look at the adjustment, we've got a big adjustment -- number two, the financial sector has lost one out of eight jobs in the investment banking community, big adjustment there. >> i thought we were talking about the state and local
government, the federal government program. >> so the thing is, down the road, you know, this year is all about making a couple of adjustments. and i think the whole idea was to spread these adjustments over a few years time period. my view, i agree with you. i think it's outrageous looking at the spending programs that are going to exist out from 2011 past. but the thing is, i definitely thought we needed something pretty substantial this year or next year. >> jeff, you get the final word. >> i want to emphasize we don't get this from heaven, we have to pay for it later. the benefits we're getting now we're going to pay for with much, much, much higher taxes down the line. if we were doing government spending on things that made a lot of sense, that were productive, that would be one thing, but a huge amount is incredibly wasteful and counterproductive and so we're in for a horrific economy unless we cut back. >> very quickly, do you anticipate inflation as a result of this? are those who see inflationary bubbles? >> i'm sorry of more in the
bernanke camp. i think he's absolutely right and in the short-term, the risk of inflation are quite moderate. three to five years, that's a serious issue, the fed has the ability to handle it, but it's a tricky issue. >> thanks, gentlemen. appreciate it. coming up next, more about the auto industry, we touched on it a little bit. will it suffer a cash for clunkers hangover? now that the popular program has ended. imagine... one scooter or power chair that could improve your mobility and your life. one medicare benefit that, with private insurance, may entitle you to pay little to nothing to own it. one company that can make it all happen... your power chair will be paid in full. the scooter store. hi i'm dan weston. we're experts at getting you the scooter or power chair you need. in fact, if we pre-qualify you for medicare reimbursement and medicare denies your claim,
here's a look at today's business headlines. the "wall street journal" reports general motors forecast u.s. sales to rise 15% next year from the 10 1/2 million units expected to be sold this year. but september sales could take a hit compared to august because of that cash for clunkers hangover. mark fields says nationwide that auto sales will rise for the first time in two years this month thanks to that clunkers program. he says with one weekend still to go, ford has already sold more cars this month compared to last august thanks to that program. and they will report the monthly sales figures early next year. melissa lee is standing by with what's ahead on "fast money."
welcome back, my dear. >> it is terrific to be back. on "fast," tonight, one analyst saying that fannie and freddie destined for zero. we'll also be talking to the ceo of one restaurant stock. all that and much more on fast, top of the hour, sue. up next here on the "closing bell," why shares of whirlpool were higher today. you're watching cnbc, we are first in business worldwide.