Board Independence is no Guarantee

Several months ago I interviewed former SEC Chairman Harvey Pitt about options backdating for my MoneyMasters video program. Pitt is a strong critic of backdating. He argues it is outright fraud.

Recently, I've been spending a lot of time studying up on Warren Buffett. Buffett is one of America's most admired CEOs. He has a clean reputation. He has been a vocal critic of executive greed. He believes many CEOs are overpaid. He also opposes the use of options to compensate executives.

Berkshire Hathaway, Buffett's company, has long been criticized for poor corporate governance practices. In particular, the board long suffered from a distinct lack of independence. Berkshire has a greater number of independent directors today, but this is only because of new NYSE listing requirements.

Despite poor governance, Berkshire Hathaway has been an outstanding stock. It has gained more than 20% annually for several decades. Indeed, there isn't any convincing evidence that companies with independent boards turn in better stock price performance than companies whose boards are not independent. However, proponents of independence say companies are less likely to end up in some sort of scandal when the board is independent.

But a new study produced by three professors argues that even independent directors may be subject to temptation. According to this study, many outside directors profited from options backdating. Lucian Bebchuk, Yaniv Grinstein, and Urs Peyer claim that 1,400 outside directors from 460 companies benefited from options backdating between 1996 to 2005. Their study indicates that the problem is less common at firms that have a majority of independent directors. But board independence provides no guarantee against options backdating.

The moral of the story is that investing is a risky game. The company's business model may succeed or it may fail. Shareholders can't even be certain the board and executives will always act in their best interests. Even independent directors may choose to enrich themselves at the expense of shareholders. The only way you can be sure that a company you own is being run to your full benefit is to run it yourself.

Fed Continues to Worry More About Inflation

The bond market has been betting for some time that the Fed would soon start cutting interest rates. But today's statement from the Fed indicates that a rate cut in the near future is not likely. The statement did talk about slowing economic growth, but it seemed to focus more on elevated levels of core inflation.

The Fed voted to stand pat on interest rates. Jeffrey Lacker, however, voted for a rate increase. The Fed seems to be leaning more toward raising rates than lowering them.

The statement specifically mentioned "a substantial cooling of the housing market." Some would say the housing market is collapsing. Indeed, that's exactly what Gary Shilling said when I interviewed him today for my MoneyMasters video program. Shilling is worried that we could see a 25% price decline nationwide, leading to an economic recession. This video will be available for viewing on Dec. 28.

High Energy Prices and Weak Housing Will Finally Take Toll on Economy

Energy prices and the health of the housing market are perhaps two of the most important factors affecting our economy today. Stocks have rallied in recent months largely due to optimistic outlooks for both of these factors. My outlook is much more pessimistic.

Oil prices peaked around $78 per barrel in late summer. Investors cheered as prices came back down. But I've been pointing out that prices are still very high. Even at $40 to $50 per barrel, they would be much higher than they were just a few short years ago. These days they are hovering above $60 and OPEC seems to be getting serious about cutting production.

OPEC has learned a very valuable lesson. Oil producing nations like to get as high a price as possible, but OPEC was always worried that if prices went too high, economies might go into recession causing demand for oil to plummet. The lesson they learned is that most economies could easily sustain $40, $50, even $60 per barrel. OPEC's target range for oil prices used to be about $25 to $30 per barrel. Today, $60 is the new $30. Now OPEC fears falling prices more than rising prices. It seems to be getting serious about cutting production to keep prices around $60. That is not good news for the U.S. economy.

Housing is also a major problem. Most economists were betting on a soft landing in the housing market. Right now, it looks like the landing may be fairly rough. Inventories are high, prices are falling, cancellation rates are rising, foreclosures are up, and the sub-prime mortgage market is seeing rising defaults.

This double whammy of high energy prices and a collapsing housing market means GDP growth in 2007 will likely be less than 2%.

Housing Stocks Surge in Response to Bad News and Lower Interest Rates

On Nov. 13 I wrote about the options-backdating scandal at KB Home and the resignation of the company's CEO and other top officials. The stock has rallied 20% since then. But it isn't the only homebuilder to surge in the past month. All the stocks in that sector are up including Hovnanian Enterprises and Toll Brothers.

Toll Brothers recently announced fairly lousy financial results, but gave some indication that it may be seeing the bottom. That helped boost the stock. Yet the housing stocks are also responding to lower interest rates. In fact, the rate for a 30-year mortgage is down 25 basis points over the past month to 5.58%. Investors are betting that lower rates will save the industry and once again spur demand for new homes.

Lower rates may stabilize the housing industry, but I seriously doubt we will see a surge in demand. This market is saturated. Speculators have already moved on to other things. Defaults are on the rise--especially in the sub-prime market. Foreclosures are also up. I don't see interest rates falling low enough to save those who are seriously overextended.

Bernanke Thinking About Raising Rates Despite More Weakness in Housing

Today's existing home sales report was mixed. The good news is that October's 6.24 million homes sold is better than expected. It is even slightly higher than September's 6.21 million figure. The bad news is that it is down 11.5% from October 2005. Even worse, the median price is down 3.5% from a year ago. And inventories are up almost 2% over the past month, and 34% over the past year. There is now a 7.4 months supply of previously-occupied homes on the market.

The price drop is particularly worrisome. That's because sellers don't have to sell if they don't like the offer. It's not reassuring for the housing industry that more homes sold than expected, but at lower prices.

After initially rising on the news, shares of homebuilders reversed course and sold off. There is growing concern that the housing market may not have yet bottomed.

On top of all this, Fed Chairman Ben Bernanke gave a talk today that stressed the risks of rising inflation. He disappointed investors by not making any mention of a possible interest rate cut. Many investors had been hoping the Fed would start easing soon. They weren't happy to hear the Fed is thinking more seriously about another interest rate hike.

Sales Up 19%. Sorry, That's 6%

It's funny how numbers are frequently used to promote a specific agenda. The National Retail Federation released spending figures yesterday for Black Friday weekend. Several media outlets jumped on one figure and put it in their headlines: "Retail Sales Jump 19%."

It would truly be astounding if retail sales actually increased 19% in one year. Of course, that is not what happened. The 19% increase refers to the average amount of money spent by shoppers. This year, shoppers spent an average of $360.15. A year ago, they spent $302.81. That's the good news. The bad news is that there were an estimated 5 million fewer shoppers this year; and sales on Black Friday were up only 6% from a year ago. That's still an impressive rate of growth, but no where near the 19% figure highlighted in the headlines. In fact, the NRF is sticking with its forecast of 5% overall growth this holiday season.

Some retailers will be having a very Merry Christmas. Apparently, Wal-Mart is not one of them. The nation's largest retailer said November same-store sales are down 0.1%. On-line retailers are expected to do very well. The on-line market is still small compared to bricks and mortar stores, but on-line is where the real growth is.

White House Says Slower Growth; Higher Inflation

Yesterday Edward Lazear, Chairman of the Council of Economic Advisers at the White House, lowered his growth forecasts. These forecasts are produced twice a year for budgeting purposes.

He called for 3.1% economic growth for 2006. That is a healthy figure, but down significantly from the June forecast of 3.6%. For 2007, he is projecting growth of 2.9%. The reduction in the forecast is primarily due to the slowing housing market.

The White House is also projecting 2.3% inflation for 2006. Despite slowing growth, it expects inflation to rise to 2.6% in 2007. But with unemployment at only 4.4% and calls for a higher minimum wage, there is a good chance that inflation will be higher. And if oil prices reverse themselves and start moving back up toward $70 a barrel, inflation will become problematic.

The housing slump and energy prices are key to what the future holds. The numbers of homes available for sale are rising quickly. Home prices will continue to fall. Homebuilders will continue to report declining earnings.

As for energy, that really depends on what OPEC does. Energy traders are skeptical about OPEC's ability to stick to announced production cuts. Saudi Arabia is the big player in this game. If the Saudis were to cut production significantly, oil prices would move higher. But if the Saudis see that other OPEC countries are not doing their fair share, they may actually raise production to teach them a lesson. That, of course, would cause oil prices to plummet.

Democrats Wait for 2008

I had an interesting discussion with Mike Holland, Chairman of Holland & Co., a New York City private investment firm. Old-timers will recognize his name from his frequent appearances on Louis Rukeyser's Wall Street Week.

Mike and I discussed the Democrats taking over Congress and what this may mean for tax policy. I asked him if the election results will prompt him to change his investment strategies. His answer was no. He still continues to favor large-cap, blue chip, dividend paying stocks. This MoneyMasters discussion is currently available for viewing.

Dining with Investment Legend Jack Bogle

There are few people in my line of work who can be called legends. There are fewer still who are living legends. Warren Buffett is one. Jack Bogle is another.

Yesterday I had the honor of interviewing Bogle for my MoneyMasters video program. Afterwards, I had the pleasure of taking him to lunch. He is a wonderful and gracious man.

As most investors know, Bogle is an advocate for passive investing. Because he believes investors cannot expect to do better than average in the long run, they are best served buying index funds that have very low fees. He has strongly criticized the money management industry for putting its own interests ahead of investors' interests. In particular, he says funds run by public corporations and conglomerates focus on maximizing returns for owners and managers--not for investors.

Bogle is a man who could have been fabulously wealthy. Instead, he created a mutual fund company, The Vanguard Group, based on minimizing fees. His whole life mission has been to increase the wealth of his investors rather than his own. While I'm sure he is comfortably well off, there is no question he could have done better for himself if he had chosen that as his goal. It was extremely refreshing to be in the company of a man who truly cares about ethics.

I learned a lot about Bogle during lunch. He told me how he had to work his way through Princeton, and how he almost failed. He told me he struggled with Paul Samuelson's economics text, but getting through that book marked a turning point in his life. He told me about some of his conversations with Warren Buffett. Many people would be surprised to learn that Buffett actually favors index funds for ordinary investors.

Bogle is an incredibly prolific writer. He has written several books. There are many more written about him. He roams the country delivering speeches. Best of all, he is more than willing to share his knowledge and opinions. You can read many of his writings at his personal website.

While we were having lunch, I noticed many people in the restaurant looking our way. Of course, they recognized Bogle. As we were leaving, one gentleman got up and came over to say hello. He thanked Bogle for sticking up for integrity in the money management industry.

My MoneyMasters interview with Jack Bogle will be available for viewing on Nov. 30. This is one video you won't want to miss.

Housing Foreclosures are on the Rise

Yesterday I heard through a reliable source that the credit union of a major corporation headquartered in Connecticut is suddenly seeing a larger than usual number of employees in financial distress. Several have approached their credit union seeking help.

Most of the problems are housing related. Many of these troubled employees had purchased homes in recent years. Others had refinanced existing mortgages. The problem is they relied on new and exotic mortgages including interest-only mortgages with very low teaser rates. These mortgages are now being adjusted to a higher rate. In addition, borrowers have to start making principal payments. They were already stretching themselves as it was, but suddenly their required monthly mortgage payments have at least doubled.

RealtyTrac, which follows foreclosure rates, says the number of homes nationwide that are in some stage of foreclosure is growing. The highest foreclosure rate is in the Detroit area, which has suffered from the automobile industry's slowdown. Many parts of Florida are also seeing rising numbers of foreclosures.

Yet many economists continue to ignore these warning signs. They all seem to be focused on holiday sales. Perhaps consumers will keep up the spending for a while, but how much longer can that last if some of the air is coming out of the housing bubble?

Options Backdating Scandal Hits KB Home

Way back in 1998, I had breakfast with Bruce Karatz, CEO of KB Home. At the time, the company was still called Kaufman & Broad. Karatz was extremely bullish about the home building industry and the prospects for his company. He turned out to be right. About a year later, I added the stock to the Special Situation Survey's recommendation list, and as everyone now knows by now, home building stocks went on a tear.

Of course, I didn't know at that time that Karatz was personally benefiting from backdating his own employee stock options. Harvey Pitt calls backdating fraud and explains why on my MoneyMasters video. There is no question that backdating is wrong. After all, it requires that you lie about when the options were actually issued. Instead of pricing them on the issuance date, you simply pick a more favorable date from the past.

Ironically, there was no reason for Karatz to backdate his options. After all, the Wall Street Journal reports that Standard & Poor's estimates that Karatz reaped $180 million from the exercise of stock options alone since 1992. In 2005, his total compensation, including options, amounted to $150 million. KB Home said backdating benefited Karatz to the tune of $13 million, which he will repay. Compared to his total compensation over the years, this is chump change. It won't make a dent in his bank account. Of course, by the time the SEC gets through with him, he may end up paying a whole lot more.

Karatz isn't the only one leaving the company. Richard Hirst, chief legal officer, and Gary Ray, head of Human Resources, are also leaving. But Ray is the only one being fired. Karatz and Hirst were allowed to resign. It seems they cooperated in the company's internal investigation while Ray refused.

Backdating is gearing up to be the next big corporate scandal. Karatz is the biggest name to fall so far, but it looks like there will be plenty more coming up in the near future.

The Middle East is not the Soviet Union

Having written recently that the economy favors the Republicans in the mid-term elections, I suddenly find myself having to defend that point of view. After all, the Republicans got trounced. However, those who read my writings carefully know that I also said the economy would not be the deciding factor in the elections. That burden fell on the war in Iraq. Most voters seem satisfied with economic conditions at the moment, but they are fed up with the Bush administration's bungling of the war. Even though the Democrats don't have a coherent plan, voters obviously felt it was time for a change.

I suspected Donald Rumsfeld might be forced to step down if the Democrats won, but I never would have guessed it would have happened so quickly. The stock market was down for the day until Rumsfeld's resignation was announced. Suddenly the market rallied and closed up for the day. If that isn't adding insult to injury, I don't know what is.

President Bush nominated Robert Gates to replace Rumsfeld. Knowing how paranoid people can be in certain parts of the world, Bush should have stressed that this Gates is from the CIA, not Microsoft.

Like Condoleezza Rice, Gates has a lot of expertise in matters relating to the former Soviet Union. That's all well and good, but isn't it time we stacked our government with some Middle East experts?

Money Matters

I traveled to Bala Cynwyd, PA yesterday to do an interview with Money Matters, a Comcast program on investing that airs on certain stations in the Philadelphia area. The co-hosts were David Ebner of Merrill Lynch and Tami Fratis of Phoenician Ventures.

We talked about the weakening housing market, slowing GDP growth, inflationary pressures, etc. They also asked me to explain the investment strategies behind the Forbes Growth Investor and Special Situation Survey investment newsletters.

In the "small-world" department, Money Matters is produced by Richard Whitfield, my cross country coach at Lower Merion High School in Ardmore, PA. It was great seeing Rich again and finding out that we are dong similar things.

The video should be available in a few weeks on the Internet. You can check it out at Money Matters.

Interview with American Superconductor's Greg Yurek

Today I interviewed Greg Yurek, the founder and CEO of American Superconductor (AMSC). In the interest of full disclosure, I have owned this stock for several years.

This company went public 14 years ago to commercialize superconducting technologies. Finally, after all these years, its largest business segment is profitable. But the company is still spending heavily on R&D so it won't be profitable on a company-wide basis for quite some time.

However, there are a couple of exciting projects. AMSC has a contract to develop superconducting motors for the U.S. Navy. These superconducting ship propulsion systems have several advantages over conventional motors including smaller size and weight. AMSC is also installing superconducting cables in a project for Long Island Power Authority.

This MoneyMasters interview will be available for viewing on Nov. 23.

BELM is a Close Out, Not a Sell

Yesterday, I dropped Bell Microproducts (BELM) from the Special Situation Survey recommended list. I didn't drop it because I think it is overvalued. In fact, I think the stock should be selling for $8-10 per share. I dropped it because it had been on our list for 28 months. We typically keep stocks on our list for no more than two years.

Yet I'm shocked at the reaction. The stock fell as much as 12% soon after our close out. I'm sure much of this is coming from swing traders who buy or sell a large number of shares in reaction to any news that comes out. News of our close out even made it onto the Yahoo message boards.

A Special Situation Survey close out is not necessarily a sell recommendation. In fact, I still believe BELM is an undervalued stock. I've owned it myself for several years and haven't sold any shares. I suspect this stock will be bouncing back rather quickly.

Wal-Mart's Results Augur Poorly for Holiday Sales

The National Retail Federation defines holiday sales as sales that take place in November and December. In 2005, holiday sales were up 6.1% to $435.6 billion. The NRF is forecasting a more subdued 5% gain in 2006 to $457.4 billion.

Yet even this forecast may be too optimistic. Wal-Mart, the nation's largest retailer, announced today that same-store sales in October were up only 0.5% year-over-year. If stores affected by last year's hurricanes are excluded, growth was 1.7%. Wal-Mart is seeing particular softness in women's apparel. What's worse, Wal-Mart is projecting no growth in U.S. same-store sales for November.

Ironically, just a few days ago investors cheered when Wal-Mart said it will slow capital spending in future periods. The stock rallied a couple of dollars per share in response. But that just turned out to be a selling opportunity. Wal-Mart has already given back those gains.

Some of Wal-Mart's losses may be going to Target, but that stock is selling off, too. So are other retailers such as Gap, Abercrombie & Fitch, and AnnTaylor, which also reported disappointing sales figures today.

The NRF's 5% growth forecast for the holiday season may be a bit too optimistic. Don't be surprised if it is revised downward in the near future.

Economy Still Favors Republicans

I got a call from Fox News yesterday asking if I thought the state of the economy plays in favor of the Republicans or the Democrats. As I write in the current issue of the Forbes Growth Investor, which was released today, I believe the Republicans still have the upper hand on the economy. Unfortunately for the Republicans, the economy will not play a big role in the mid-term elections. Polls indicate that voters are more concerned about Iraq.

Although the trends are not favorable, for the most part the economy is doing well. GDP growth is slowing, but it's still healthy. Companies are laying off workers, but the unemployment rate is low. Inflation is rising, but it's relatively tame.

One thing to keep in mind, however, is that the economy was doing well during the Clinton administration, too. But when it began to slow toward the tail end of that era, Republicans started warning that the economy was headed into recession. Democrats scoffed at the notion, yet the Republicans turned out to be correct. Today, the tables are turned. The Republicans are the ones in power with a good but slowing economy. So far, I still think the chances of recession are remote. However, the probability keeps rising. Energy and housing will play key roles.

Meanwhile, corporations keep reporting outstanding profits. Standard & Poor's Howard Silverblatt who tracks the numbers is my next guest on MoneyMasters. This video will be available for viewing Thursday morning at 6:00 am.

Weak GDP Figure Means Rate Hikes Are Likely Over

There is no longer any doubt about slowing economic growth. Today's advance estimate of 1.6% real GDP growth for the third quarter is well under the 2.1% consensus estimate. It is also much lower than the 2.6% figure recorded for the second quarter.

The advance estimate is the most inaccurate because it is derived from incomplete data. Most likely, the figure will be revised. Yet the 1.6% growth figure provides no comfort. Many economists were warning about slowing growth, but few foresaw growth slowing this much.

Surprisingly, the consumer is holding up. Real personal consumption expenditures expanded 3.1%, contributing 2.13 points to GDP growth. But real residential fixed investments plummeted 17.4%, subtracting 1.12 points from GDP growth. Net exports subtracted 0.58 points from GDP growth.

Perhaps the best news in the report is the price index for gross domestic purchases. It was up just 2% as compared to the second quarter's gain of 4%. This means the Fed can worry a little less about inflation.

The recent rally in stocks was largely based on a bet that GDP would keep growing at 2-2.5%. Now we know that growth is slowing more than most investors had been expecting. We are also getting signals that the housing market is more troubled than many thought. Calls are rising for the Fed to start easing. Perhaps it's a good time to take some cash off the table.

OPEC's Credibility Problem

Boy, does OPEC have a credibility problem. The cartel was rumored to be considering a production cut of a million barrels per day. However, it was concerned the market wasn't taking it seriously. So, it held an emergency meeting and announced it would cut production by 1.2 million barrels per day. What did oil traders do? They bid down the price of oil.

Let's see if we've got this straight. OPEC announces a greater-than-expected production cut and oil prices fall. It seems no one is taking OPEC seriously--and for good reason. OPEC doesn't have a good record of making planned production cuts stick. That's because member nations have an incentive to cheat and produce more than their assigned quotas.

I bet OPEC nations know they've been getting a great deal. Thanks largely to Osama bin Laden and his terrorist network, oil prices have been factoring in a fear premium of perhaps $10 to $20 per barrel. Now that the fear is subsiding, so is the premium. Lower prices are also the result of a mild hurricane season, and a marginal decline in demand caused when gasoline prices hit $3 per gallon in August.

Can OPEC make production cuts stick this time? That depends on how much member nations love high prices. The planned cuts are supposed to go into effect on Nov. 1. They may stick for a while, but if history is any guide, many countries will soon be pumping more oil than they agreed to. As always, the burden will fall on Saudi Arabia. If the Saudis cut production in a meaningful way, oil prices will stabilize. If they don't, prices could fall to the mid-$40s in no time at all.

Falling oil prices get at least some of the credit for the rally in stocks. The S&P 500 is well above the yearend target set by the firm's investment policy committee. But Standard & Poor's Chief Investment Strategist Sam Stovall says it could go higher. He tells us why in the current segment of MoneyMasters.

Eating Crow with Egg on Face

Regular readers of this blog know that I have not been bullish on Google (GOOG). It's not that I don't like the business. I think it's a great company. It's just that I also think the stock is overvalued.

One valuable lesson I have learned over the years is that overvalued stocks can get a whole lot more overvalued before coming back to earth. Google certainly isn't in the same boat as some of those Internet stocks back in the 1990s that reached unrealistic valuations despite having no earnings. Google makes good money. But is it really worth 15 times sales and 45 times projected earnings?

Amazon.com might provide a basis for comparison. At its peak, the stock was selling for 30 times sales. Today it sells for only 1.5 times sales.

I love Google the company, but I'm still avoiding Google the stock.

High Prices Will Reduce Dependence on Foreign Oil

Today's Wall Street Journal has an interesting article about what lower gasoline prices are doing to the alternative-fuels industry. Although gasoline is still on the expensive side, there is concern that interest in ethanol, hybrid vehicles, and other fuels and technologies may quickly wane if gasoline prices go much lower.

I've written about this vicious cycle before. When gasoline prices spike, we see a marginal reduction in demand. That results in higher inventories, which cause prices to come back down. When prices fall, drivers fill up their SUVs and hit the road again.

President Bush is very concerned about this. He says America is addicted to oil and considers our dependence on foreign energy a serious national security and economic threat. He has made it a priority to push alternative fuels and technologies. Although he's happy to see gasoline prices go lower, he is worried that lower prices may kill the enthusiasm for alternatives.

Ironically, Bush and the Republicans have also been accused of somehow causing gasoline prices to fall in order to improve their chances in the upcoming mid-term elections. This is baloney. Oil and gasoline are commodities whose prices are set in open markets by buyers and sellers. Other than ordering the release of oil from the Strategic Petroleum Reserve, the president cannot affect prices in the short term.

As I've written before in the Forbes Growth Investor, I am opposed to price caps on gasoline. Capping the price will result in shortages. However, I am in favor of a price floor.

Price is the best way to affect behavior. If you want people to use more of something, make it cheaper. If you want them to use less, make it more expensive. By setting a floor on gasoline prices, we can get consumption under control. Gasoline would not be wasted and there would be a real incentive to move toward alternatives.

The government would collect the difference between the floor price and what the market price would have been without a floor. Don't get me wrong. I am not in favor of giving the government more of our money. Those revenues should be used to fund research into alternatives, and to reduce other taxes.

Of course none of this is likely to happen. Setting a floor requires the kind of political fortitude that many elected officials lack.

Dancing With Myself

Billy Idol released the hit song Dancing With Myself in 1981. Sometimes, I feel like I'm debating with myself. So it's nice to get some feedback.

Of course, it's not always pleasant. For example, one blog reader recently said he was tired of me always being negative. I'll admit, I've been skeptical of the stock market's recent rally, but I'm not always negative. I was bullish on stocks until late 1998. I turned bearish about 14 months too soon, but it turned out to be a good call. I turned bullish again in September 2002. The market briefly rallied, came back down, then started a nice bull run that is still going.

But I am bearish once again. I just don't see what all the excitement is about. So far, the Fed seems to be doing an admirable job of orchestrating a soft landing, but I think GDP growth is likely to fall below 2% for at least several quarters--perhaps for all of 2007. And I don't believe the Fed is getting ready to cut rates any time soon. I still see inflation and inflationary expectations running above the so-called comfort zone.

It's nice that oil and gasoline prices have come down from their August highs, but I defy anyone to argue gas is cheap. Anyway, gasoline prices almost always come down after the summer driving season. Admittedly, the recent decline has been more like a plunge, but even today the national average price is well above $2 per gallon.

In the immediate future, however, two things will drive the market. The first is housing. Data on housing starts and building permits will be released on Wednesday. The market is looking for about 1.65 million starts and 1.72 million permits. The second is third-quarter corporate earnings. This is the first big week of earnings releases. While I'm not sure if there is such a thing as a bellwether anymore, several key companies will announce results in the coming days. EMC, Johnson & Johnson, and United Technologies will report tomorrow morning, as will a number of banks. IBM, Intel, Motorola, and Yahoo will report tomorrow after the market closes. Each of these companies has market-moving potential.

Finally, I want to thank Karthik Narayanaswamy for his nice comments about my blog. I now know that at least one person out there wants to see more of my musings. Turns out Karthik has a nice blog of his own called Karthik's Random Ramblings. You should check it out.

Thinking Negative Thoughts

As I write this entry, there is a building burning on the upper east side of Manhattan. It appears that a small airplane or helicopter crashed into the building. Although it's probably just an accident, in this post-9-11 world, you have to wonder if it is terrorism related.

Perhaps news of a burning building has put me in a sour mood. It got me thinking about overvalued stocks. With the Dow at a record high, it might be a good time to think about this.

Google (GOOG) is the most obvious one that comes to mind--especially after it announced plans to buy a company that makes no money for $1.65 billion (see previous post). Google itself is a profitable company, but it is selling for more than 40 times expected earnings, more than 15 times sales, and almost 10 times book value. There are stocks out there that are more overvalued, but none that has a larger market capitalization.

Starbucks (SBUX) is another stock that appears overvalued. It is selling for 51 times expected earnings, almost 4 times sales, and 11 times book value. That seems like a lot to pay for what amounts to a chain of restaurants. Of course, Starbucks has tremendous growth prospects, but that doesn't warrant buying the stock at any price.

Finally, I still think the homebuilders should be avoided. I can't argue they are overpriced. In fact, their multiples look incredibly attractive. However, they are negative growth stories. Earnings are not growing; they are declining. These stocks may not sink a lot lower, but I certainly would not expect them to go higher in the near future.

YouGoogle

Is the Internet euphoria of the 1990s coming back into fashion? Things aren't quite that bad, at least not yet, but Google's announcement that it will pay $1.65 billion to buy
YouTube certainly makes me wonder.

YouTube is the king of Internet video. Any person can post videos of themselves, or anything else for that matter, on YouTube. Most of the videos are short in length and of poor quality. Most are tongue-in-cheek and have no important message. A good example is the one of a young man who films himself reacting to the tastes of different spices, which he stuffs into his mouth.

YouTube gets lots of eyeballs, but makes no money. Paying for eyeballs was all the rage back in the 1990s. But all the eyeballs in the world don't count for much unless their owners are willing to shell out bucks to buy something.

Some say eyeballs are all it takes to entice advertisers. But advertisers will pay only if the eyeballs belong to the right demographic. Advertisers will pay more to reach one pair of eyeballs belonging to a potential customer, than 100 pair belonging to those who couldn't care less about the message. And it remains to be seen how many viewers will stay loyal to YouTube if they have to watch commercials.

Google's CEO Eric Schmidt made some standard statements about how the two company's complement one another and share similar values when it comes to serving users. Google's founder Sergey Brin expressed hope that money will be made through video advertising, but no specifics were given.

Even though Google has about $10 billion in cash and marketable securities, it chose to pay for YouTube with stock. That was probably a wise decision for Google, and makes it a tax-free transaction for YouTube. However, the transaction price is fixed, so if Google shares fall in value, a greater number will be needed to close the deal.

The transaction is a great deal for YouTube and its founders. They are now rich men. But it's a big bet for Google. Right now it looks like Google is paying way too much. Unless it can come up with a way to turn YouTube's eyeballs into cash, it will regret this investment.

Forbes Roundtable Discussion

On the evening of Wednesday, Oct. 4, Forbes Investors Advisory Institute hosted a Roundtable discussion featuring Bob Stovall, Gail Dudack, Vincent Catalano and Subodh Kumar. I also participated in the discussion. Wally Forbes moderated. The tape is about an hour long. Click here to listen to the discussion.

I was happy to see Barron's quoted some of my comments last weekend from the Forbes Growth Investor. Unfortunately, they misspelled my name. Several people asked if I was upset about this. Hey, with a name like mine, I'm thrilled they even came close.

Liz Ann Sonders on MoneyMasters

My MoneyMasters interview with Liz Ann Sonders is now available for viewing. Liz Ann is the Chief Investment Strategist at Charles Schwab & Co. Because she has a tendency to be bullish, it is worth paying attention to why she is now bearish.

She is particularly worried about the housing market. She wrote an interesting market outlook piece for Schwab recently saying the current housing downturn is unique because it isn't being driven by falling incomes or rising unemployment. Instead, speculation is coming out of the market. As a result, the downturn could be more severe than average. Because she believes the housing downturn could negatively impact stocks, she is recommending a marginal decrease in equity exposure.

Housing experts often talk about affordability. The National Association of Realtors has a widely followed Affordability Index. This index considers median prices, mortgage interest rates, monthly principal and interest payments, and income. Except for a pop in August, this index has primarily been on a downward slide, which means home ownership is becoming less affordable.

Interestingly, the index does not consider property insurance and taxes. Yet in some states, property taxes account for a major portion of the homeowner's monthly payment. And in many areas, property taxes are the fastest rising cost of home ownership. Just imagine how much more rapidly the NAR's Affordabilty Index would be dropping if it included property taxes among its components.

Dow's At a Record, Market's Not

A Forbes colleague asked today what I thought the odds were of the Dow hitting 13,000 by the end of 2007. Good question. There is always the chance that the bull market in large-cap stocks will continue, but I remain skeptical.

The Dow is at an all-time high, but as I keep pointing out, the stock market isn't. The Dow consists of 30 stocks. The market consists of thousands. Furthermore, if you dig into the Dow, things don't look so great. General Motors (GM), a money-losing company, is the best-performing stock so far this year. It's also the smallest-cap stock in the index. AT&T (T) and Merck (MRK), also somewhat troubled companies, are the second and third-best performers. Hewlett-Packard (HPQ), currently embroiled in controversy, is in the number 4 spot.

October just started and the Dow is already showing a gain for the month. But the S&P 500 and Nasdaq are down. In fact, despite today's rally, most of the broader market averages are down so far this month.

Here are some reasons why I remain cautious:

1) The housing downturn will probably be more severe than many economists expect.

2) OPEC will probably get serious about cutting production in order to keep energy prices from falling much lower.

3) Corporate profit growth has slowed in recent quarters and will likely keep slowing. Furthermore, much of the growth in recent quarters came from energy-related stocks. That story is probably over.

4) I'm not convinced the Fed has killed inflation.

5) The yield curve is extremely inverted between 6 months and 5 years, which tells me the economy will probably slow more than many expect.

NPR, Fox News, and Real Tax Cuts

I had a busy media day yesterday. In the morning, I did an interview with Here & Now, a syndicated radio program that airs out of Boston's WBUR and is carried by many NPR stations. The interview focused on calls to boycott Citgo, the gas station chain owned by Venezuela's PDVSA. Host Robin Young wanted to know where I stand on the issue.

I gave her two answers. I said Vahan the Economist thinks the boycott would do more harm to Americans than to Citgo and Venezuela. That's because Citgo employs thousands of Americans, and a successful boycott could put many of them out of work. Furthermore, if we refuse to buy gasoline from Citgo, we'll simply have to buy it elsewhere. Because U.S. refiners are already stretched, chances are we'll have to import more gasoline at a higher cost. Citgo, on the other hand, will simply sell its gasoline to some other market. Take a look at Iran. The U.S. buys no oil from Iran. Yet Iran has absolutely no trouble selling all the oil it wants. Other countries are happy to buy it.

However, Vahan the American supports the Citgo boycott. I was extremely offended by Hugo Chavez's remarks at the United Nations and in Harlem. While I have no problem with him criticizing U.S. foreign policy, I object strongly to his personal attacks on our president, and to his calls to overthrow our government. Although the economist in me realizes that boycotts are not very useful, I have consciously been avoiding Citgo stations for about six months now.

Last night, I appeared on Hannity & Colmes on Fox News. First of all, I'd like to say that even though I have conservative leanings, I thought Alan Colmes, who plays the liberal on the show, is an extremely nice guy.

Colmes wanted to know why Americans don't feel better about the economy. He pointed out that gasoline prices are way off their highs, yet people still seem nervous. As I've explained before on this blog, a 50 cents per gallon drop in gasoline prices amounts to only about a $30 per month savings for the average driver. When you're paying $10,000, or $20,000, or more each a year in property taxes, you're not going to get very excited about saving $30 a month on gasoline. Furthermore, this myth that gasoline is once again cheap is false. Despite coming off its highs, gasoline prices are still very expensive.

I pointed out that people are more focused on the slowing housing market. Sean Hannity didn't buy that. He said housing is healthy. Indeed, new home sales were up slightly from July to August. But they were down 17% year-over-year. That's the more relevant comparison.

Hannity also said the stock market is near an all-time high. Unfortunately, there wasn't time to respond to that remark. The fact is the market is not near an all-time high. Only the Dow is near an all-time high. Most other indexes are still well off their highs. The reason the Dow is doing better than the rest of the market is because investors are getting nervous. When investors get scared they tend to rotate out of smaller-cap issues and flock to large cap stocks--the kinds of stocks you find in the Dow. Furthermore, it gives me no comfort that the best performing stock in the Dow by far is General Motors (GM), a money-losing company.

I finished up by saying a tax cut would do wonders to give the economy a boost. Hannity agreed with that. Colmes didn't. Yet what we need is a real tax cut. Bush's tax cuts were a folly. Although he lowered tax rates, he forgot to get rid of the Alternative Minimum Tax. I don't know about the rest of you, but after factoring in the AMT, state taxes, and property taxes, my after-tax income has gone down, not up.

New Home Sales Beat Lowered Expectations

This morning, the Census Department announced new home sales of 1.05 million for August. This was better than expected, but it wasn't good news.

Some insist it was good news. After all, August sales were up 4.1% from July. However, July sales were revised downward, and there is a good chance that August sales will also be revised downward. So this 4.1% gain doesn't provide much comfort. Furthermore, August sales were down 17.4% from August 2005, and the median sales price was down 1.3% during the same time. Any way you look at it, the new homes market is weakening just like the existing homes market.

Fortunately, many of the large homebuilders are publicly traded companies. As a result, we can get a better handle on what is really going on in the industry. The latest news came out of Lennar Corp. (LEN). The company announced better-than-expected earnings, but expectations weren't very good to begin with. In fact, earnings were down almost 40% from a year ago. The gross profit margin fell 760 basis points. New orders also fell. Management reduced earnings guidance for the fourth quarter.

Homebuilders are making concessions to keep selling. But buyers are getting smart. They are expecting even more and bigger concessions. They are also holding out for lower prices. Even falling mortgage rates haven't been enough to lure them off the fence.

Despite current problems, the overall housing market is still healthy. Will things level off nicely as those hoping for a soft landing say? Or will they deteriorate so badly that the economy sinks into recession? My view is somewhere in between. The housing slowdown will be worse than most economists are currently predicting. Yet I still believe we can avoid recession. A tax cut would certainly do wonders at the moment, but that seems about as likely as a camel passing through the eye of a needle.

I'll Huff and I'll Puff

Housing prices are falling. I'll say it again. Housing prices are falling.

Just to be clear, I don't mean to say that the rate of growth in housing prices is falling. It is the actual prices that are falling. This is the first time existing home prices have fallen on a year-over-year basis since 1995. I guess we can say the housing boom is officially over.

Yet investors cheered the news because existing homes sales came in a little better than expected. They fell 12.6% from a year ago instead of 14%. For some reason, investors concluded this was good news, so they reacted by bidding up shares of homebuilders.

That doesn't seem rational. After all, existing home inventories are up 38% from a year ago to a 7.5 months supply. On Wednesday, we'll learn more when new home sales figures are released.

Speaking of new home sales, I had the pleasure of dining with a major New Jersey homebuilder on Friday night who expressed concern about the weakening housing market. He also said something very interesting. Instead of building the same 3,000 square foot homes, but selling them at lower prices, he is now building smaller houses. He said he has to do this, otherwise his previous buyers would get very upset. This may make price comparisons more difficult, but it doesn't hide the fact that prices are falling.

The housing market represents a major portion of GDP. As the market weakens, so will GDP growth. I'm not yet predicting a recession, but there is no doubt that what is happening to housing right now will have a negative impact on consumer spending.

Dunn Takes the Fall

Hewlett-Packard got rid of Patricia Dunn. Someone had to take the fall.

No one has been convicted of anything yet, but it does appear that laws were broken in H-P's attempt to find out who at the company was leaking information. The fact is there was a leak. H-P has every right to expect employees and directors to keep confidential information confidential.

So if Dunn knew someone had loose lips, what's wrong with her trying to find out who it was? She certainly should have used every legal means available.

Dunn maintains she wasn't aware the investigators she hired broke the law. Is she telling the truth, or is she merely a scapegoat? Cynics find it hard to believe Dunn is completely innocent. But if her hands are dirty, chances are other hands are dirty, too--perhaps even those of CEO Mark Hurd. I suspect a lot more shoes will drop before this case is over.

Who's the Real Devil?

The president of Venezuela, Hugo Chavez, is in Harlem at the moment offering to sell cheap heating oil to the masses. That's mighty big of him now that oil prices have come off their highs.

Yesterday, Chavez addressed the United Nations. Several times he referred to President Bush as the devil. His buddy, Evo Morales of Bolivia, did an impressive impersonation of a drug dealer, waving around a coca leaf in his hand. Even President Ahmadinejad of Iran was more respectful. Yet the audience applauded Chavez enthusiastically, which makes me wonder why we host the U.N. in the first place. Why not pack it up and send it to Caracas? Then we'll see just how accommodating Chavez is to foreigners who insult him in his own backyard.

Back in 1994, when Venezuela's government was more friendly toward the U.S., I was invited to teach a short course in capital budgeting to PDVSA executives. PDVSA is the state-run oil company. The students were very smart and favorably inclined toward modern techniques of investment analysis. No doubt under the current regime many of my former students are out of work.

Countries like Venezuela and Iran are swimming in cash because oil prices went up so high. This windfall has made them arrogant and more willing to openly criticize the U.S., the world's biggest oil consumer. But if current trends continue, they will tone down the rhetoric.

Oil prices are headed lower because oil traders no longer fear impending shortages. We haven't run out of oil despite tensions with Iran and Venezuela, troubles in Nigeria and Iraq, and a production cut in Prudhoe Bay due to BP's pipeline corrosion problems. Not long ago, gasoline prices rose above $3 per gallon. That was enough to reduce demand on the margin. Oil and gasoline inventories are now higher than expected. But prices will eventually stabilize simply because lower prices invite more demand.

Conspiracy theorists are convinced that the Republicans have somehow managed to figure out how to manipulate oil and gasoline prices. According to this theory, the Republicans are pushing prices lower at the moment in order to improve their chances in the upcoming elections. Don't you buy it. Oil is a commodity. The price is set by buyers and sellers in the futures markets, not by politicians in a back room. If the Republicans were truly able to lower prices, they would have done so long ago. Besides, despite the recent drop, prices aren't cheap by any stretch of the imagination.

Keep Your Options Open

Some investors think options are for investors with a high tolerance for risk. On the contrary, if used properly, options can actually reduce risk. For example, if you own a stock and are worried the price may fall, you can buy a put option on that stock. If the price does fall, your gains on the option will offset your loss on the stock.

Straddling is a strategy investors can employ if they are unsure about the market's direction. Suppose you can't decide if the market will go up or down. You can buy a call option and a put option on an index. You make money if the market rises or falls--just as long as it moves enough to make up for what you paid for the options.

The VIX is an index that measures volatility. More specifically, it measures implied volatility from options contracts. Right now, this index is at relatively low levels. Because the value of an option is positively related to volatility, this means that options are relatively cheap at the moment. If you are interested in buying options, this might be a good time to do so.

If used improperly, options can significantly increase investment risk. Make sure you know what you are doing before employing an options strategy. The Forbes Stock Market Course has a section devoted to futures and options contracts. It's a good place to start your options education.

Cruisin' Asia for Investment Ideas

If you're looking for a real good time, you should consider going on the Eleventh Forbes Cruise for Investors. The cruise, scheduled for April 6-20, 2007, starts with a tour of Beijing then goes to Shanghai, Nagasaki, Osaka, and ends in Hong Kong.

I'll be giving a presentation on this cruise and taking part in a couple of panel discussions. I've taken part in a few of these investment cruises before, and I can assure you they are fun and educational.

The J Curve

I just conducted a fascinating MoneyMasters video interview with Ian Bremmer, President of the Eurasia Group. Ian, who completed his doctorate at Stanford University when he was just 24 years old, started his business less than 10 years ago. The Eurasia Group is a consultancy that specializes in political science. It helps corporations and hedge funds assess political risk in more than 60 countries.

Our discussion focused on his recently published book called
The J Curve: A New Way to Understand Why Nations Rise and Fall. The title refers to the shape of the curve you get when you plot a country's stability on the vertical axis and its degree of openness on the horizontal axis. Ian's thesis is that closed but stable countries such as North Korea and Iran, cannot transform themselves into open countries without going through a period of severe instability.

Even China is not immune to this rule. Of course, China has managed to transform its economy, but its political structure remains closed. Ian warns that the world could face significant dangers if China suffers instability as its political system inevitably begins to open.

This MoneyMasters interview will be available for viewing on Thursday morning at 6:00 am. By the way, for all you iPod fans out there, you can now subscribe to these videos for free. Simply go to the iTunes music store and search for "MoneyMasters" or "Janjigian". Enjoy!

Energy vs. Housing

As far as the economy is concerned, which is more important? Energy or housing? According to the Bureau of Economic Analysis, expenditures on gasoline, fuel oil and other energy goods made up 2.7% of our $13.2 trillion GDP in the second quarter of this year. Residential investment amounted to 6%. Another 14.1% went to housing-related services. Therefore, even a moderate decrease in home prices would likely offset the benefits of lower energy prices.

Not many people are talking about this. Right now, they're simply celebrating the fact that gasoline prices have come down from their recent highs. When it comes to gasoline, consumers have very short memories. They remember well what they paid the last time they filled the tank. But they have trouble remembering how much they paid 100 tankfuls ago. If gasoline is cheaper today than it was a week ago, they feel good. They don't really care to remember that it's more expensive than it was just two or three years ago. Those days no longer seem relevant.

However, as an investor, I would focus more on housing right now. Although the official figures show that prices haven't yet fallen on a year-over-year basis, appreciation has slowed considerably. Coming reports will no doubt document falling prices. That is when we could see a significant hit to consumer spending.

I'll be discussing some of these topics on MSNBC on Sunday morning around 10:45 EST. Tune in if you can.

Expensive is the New Cheap

As gasoline prices were going up, a number of vocal economists told us we shouldn't worry. They said the U.S. economy could weather much higher prices. They said consumer spending wouldn't take a hit.

For the most part they were right. Gasoline hit $1.80 per gallon, then $2 per gallon, eventually rising to more than $3 per gallon. We didn't really see a slowdown in consumer spending until prices hit those highest levels.

Yet I have to laugh at today's article in the Wall Street Journal. It argues that the recent drop in gasoline prices bodes well for consumers. There is no question that consumers are better off paying lower prices. But if we are to believe that rising gasoline prices won't hurt consumer spending, why should we believe that falling prices will give spending a boost?

The bottom line is that the price of gasoline has to move considerably before consumers take notice. That's because, contrary to popular belief, gasoline represents only a small component of the overall cost of driving. It is dwarfed by the cost of other things, such as the cost of buying or leasing the vehicle, the cost of maintaining the vehicle, and the cost of insuring it.

Look at this way. If you drive 12,000 miles in a year, and you get 18 miles per gallon, you need to purchase 667 gallons of gasoline. If the price of gasoline falls by 50 cents per gallon, you save just $333 dollars, or $28 per month--about the cost of one meal in a decent restaurant.

Let's not forget that despite the recent price drop, gasoline prices remain much higher than they were just a few years ago. John Gibson who anchors "The Big Story" on Fox News, asked me back then if people should think about canceling their vacation plans. At the time, gasoline prices had inched up to $1.80 per gallon and the media were in a frenzy about painfully high prices. Today, with the national average price at $2.60 per gallon, we're supposed to believe gasoline is cheap?

Why Didn't She Just Ask?

Hewlett-Packard (HPQ) has been making headlines recently, but not because of its outstanding financial results. Instead, the company is being accused of breaking the law. It hired private investigators to find out who on its board of directors leaked information to the media about a strategy meeting the board held with CEO Mark Hurd. Apparently, these investigators faked their identity in order to obtain telephone records. This practice, known as "pretexting," is illegal.

While it isn't yet clear if the company or Chairman of the Board Patricia Dunn were aware of the methods the investigators employed, it is clear that a director was indeed talking to the press. That director is believed to be George (Jay) Keyworth. He was asked to resign but refused to do so.

Dr. Keyworth has a stellar reputation. He has a Ph.D. is physics, worked at Los Alamos National Laboratory for many years, and served as Science Advisor to the Reagan administration. But none of that gives him a free pass. A company has the right to expect its directors to keep certain things confidential. After all, directors have a primary obligation to the stockholders. A company with a leaky board could lose its competitive advantages.

However, what is really odd about all this is Ms. Dunn's determination to unearth the culprit surreptitiously. Why didn't she simply ask the board members which one of them talked to the press. Chances are Dr. Keyworth would have admitted his indiscretion and apologized.

What Dr. Keyworth did was wrong, but it wasn't illegal. It was simply an exercise in poor judgment. Furthermore, it doesn't appear his discussions with the media did any harm to HPQ. It doesn't seem to have given HPQ's competitors any advantage.

What the investigators did was illegal. Even if Ms. Dunn didn't know what they were up to, chances are her days on the board are numbered. Indeed, it looks like we'll be seeing many new faces on HPQ's board in the very near future.

Don't Get Too Exuberant Over Lower Gasoline Prices

With the futures price of unleaded gasoline down about 25% from its early August high, investors are asking if the recent energy "crisis" is finally over. A few things to keep in mind:

First of all, there never was a real energy crisis. The Arabs didn't boycott the U.S. and gasoline stations didn't run out of product.

There is no denying supplies are tight. The world is producing close to full capacity and it is consuming almost everything it produces. And there is little slack left in the system. Most major oil-producing nations can't produce more without making significant additional investments.

But there is also a "fear factor" at play. Oil prices didn't go up because of shortages. They went up because of potential shortages. Oil investors and speculators are justified in being worried. After all, there are reasons to worry about Iran, Venezuela and Nigeria. Iraq still isn't producing to its full potential. In fact, many the top oil producing nations are anything but stable. And of course, we saw what kind of damage a hurricane like Katrina can do oil and gas production in the Gulf of Mexico.

However, fear has suddenly abated somewhat in recent weeks. The United Nation's deadline for imposing sanctions on Iran has come and gone, and nothing much has happened. As for hurricane season, so far it hasn't been too menacing.

But something else is happening. Oil prices are down about 10% from their early August highs, yet gasoline prices are down 25%. Gasoline prices have also fallen much more than diesel prices. According to the latest reports, gasoline inventories are up more than expected.

I believe this is evidence of that vicious cycle I've talked about before. When gasoline prices rise, demand falls at the margin. When demand falls, prices recede. Lower prices then invite consumers to fill up the SUV again. Demand goes up, and so do prices.

Today's news that Chevron discovered new oil in the Gulf of Mexico is certainly good. It will keep prices from rising higher than they would have, but I seriously doubt prices will fall significantly. Chevron is rumored to have spent about $100 million to develop this deep-water well. This kind of investment is justified only if oil prices are expected to remain high. It wouldn't have made much sense for Chevron to spend so much money if it expected prices to fall back to $20 or $30 per barrel.

While it's certainly nice to see gasoline prices lower, we shouldn't get too exuberant. After all, prices are still about 45% higher today than they were just two years ago. Gasoline prices will have to go much lower to really boost consumer confidence.

Freezing in Bar Harbor

While vacationing in Bar Harbor, which is much colder this time of year than I expected, I noticed that gasoline prices have been falling. The lowest price I spotted here in Maine is $2.56 per gallon. But I see the price has been falling nationwide. This is probably due to rising inventories--perhaps caused by falling demand. My guess is that many people cut back on vacation plans this summer because they were anticipating much higher gasoline prices.

We may be in a vicious circle. First, demand strengthens. Then gas prices go up. Then high prices reduce demand, and prices fall. Then demand strengthens again, and so on and so on.

While I continue to believe oil and gasoline prices are unjustifiable high, I seriously doubt they will fall back to levels I would call cheap. As long as oil is above $60 per barrel, I will continue to worry about the economy's health.

Housing Hits the Ceiling

With this week's release of housing data, it's clear that the residential real estate market is on a downward spiral. But will the landing be soft or hard?

Existing home sales were down 11% year-over-year. Inventories were up 40%. The supply of previously occupied homes on the market now stands at 7.3 months. The median price fell in every region of the country except the South. Overall, the median price was up just 0.9%.

New home sales are also suffering. They were down 4.3% year-over-year, and there is a 6.5 months supply of new homes on the market. The median price was up just 0.3%.

We talked a little about the existing home sales figures last night on Kudlow & Company on CNBC. Larry Kudlow believes the slowdown is good news because it makes it even less likely that the Fed will resume raising interest rates. That's certainly true. But I pointed out that if the Fed continues to stand pat, it will be because the economy has slowed too much, and not because inflation is under control.

We also talked about higher-than-expected inventories of oil and gasoline. Oil and gasoline futures prices fell in response. Optimists say gasoline will soon be down to $2.70 per gallon.

I'm constantly amazed by people who think something is cheap when it comes off its recent highs. Gasoline at $2.70 per gallon is certainly cheaper than the $3.00 or so we saw recently. However, it's much more expensive than prices just one year ago.

Furthermore, we should ask why inventories were up. I see two possible explanations: 1) Demand fell, or 2) Imports rose. Neither is good for the economy.

Back to housing. So far, prices haven't fallen. But as I said in my August 22 posting, this is most likely due to sellers making concessions. It won't be long before we see falling median prices nationwide. A soft landing is still possible in the residential real estate market. Unfortunately, a hard landing is looking more likely.

I'd also like to encourage you to watch my latest MoneyMasters interview with Vincent Catalano. Vinny is President of Blue Marble Research and author of the recently published Sectors & Styles. He explains how ordinary investors can create effective portfolios just like the pros simply by using Exchange-Traded Funds.

Housing Numbers Coming Up

Yesterday, during an appearance on CNBC, I said I would focus this week on housing numbers. The National Association of Realtors will release existing home sales figures tomorrow morning at 10:00 am EST. I'm expecting less than 6.6 million homes sold in July and more than 7 months of supply in inventory.

But I'm really more interested in prices. The median price in June was $231,000. That was up just 0.9% from June 2005. The median price in July 2005 was $228,000. Some investors are worried that the July 2006 price will fall below this number.

However, prices are skewed by concessions and incentives. For example, suppose a house sells for $230,000, but the seller agrees to swallow $5,000 worth of renovations and closing costs. The net price is $225,000. Yet the reported price of the transaction is $230,000.

As I explained on CNBC, if such givebacks were factored in, we could have already seen a year-over-year decrease in prices.

New home sales for July come out on Thursday. The expectation is about 1.1 million, which would be almost 20% less than July 2005's figure. Again, I will be looking more closely at prices.

Today's earnings report from Toll Brothers is a clear warning that the industry is slowing. Toll Brothers has a trailing PE ratio of less than 5, so many investors believe the stock is dirt cheap. But earnings are expected to decline. In fact, based on the fiscal 2007 estimate, the PE is more than 8. That's still pretty low, but it's usually not a good idea to invest in a negative growth stock. Even though the price has fallen back to 2004 levels, it could go lower.

Older and Wiser, or Just Older?

I just celebrated my 50th birthday. Some would say I'm older and wiser. Others, that I'm just older. Whatever I am, I'm still bearish on stocks.

Nonetheless, we did see a bit of a rally this week. That was primarily the result of better-than-expected PPI and CPI numbers. This gave credence to the Fed's theory that a slowing economy will dampen inflationary pressures. As a result, investors are now betting that the Fed will not have to resume raising rates.

The rally was also bolstered by oil prices, which fell quite a bit after BP's announcement that it wouldn't have to shut down Prudhoe Bay production completely as it initially said.

Now, let's see if I've got all this straight: Stocks rallied because economic growth is slowing and oil is only $70 per barrel. For some reason, it doesn't make much sense to me.

I expect GDP to grow at about 2.5%. That's not bad, but it's not exactly a reason to jump into stocks. Furthermore, $70 per barrel for oil is cheaper than the recent high, but it isn't cheap. Seven years ago, oil was less than $20 per barrel. Just three years ago it was around $30. So I'm supposed to be impressed that it's fallen all the way back to $70?

As for inflation, despite the seemingly good news this week, it's still a worry. The CPI is up 4.1% year-over-year. The core rate is up 2.7%. Year-to-date, the CPI is up 4.8% on a seasonally-adjusted basis.

Yes, I'd agree that right now there's a good chance the Fed won't raise rates at its Sept. 20 meeting. But before betting on that, I'd want to see more data. We'll get plenty of that between now and the Fed's next meeting.

Stagflation a Real Possibility

Today's rally fizzled. Despite being up more than 100 points in the middle of the day, the Dow eked out only a 10 point gain.

The initial rally was credited to BP's announcement that it won't completely shut down production in Prudhoe Bay. The apparent end to fighting between Israel and Hezbollah also helped push stock prices higher.

But the gains melted away when investors became pessimistic about the PPI and CPI numbers, which will be released over the next two days. The fear is that inflation is running higher than the Fed's comfort level. Despite the recent pause, investors are afraid the Fed will have to resume raising rates.

The Fed is in a pickle. Economic growth is slowing, but inflation is rising. The Fed stopped raising rates because it was more worried about slowing growth than rising inflation. But if this week's inflation numbers are higher than expected, the Fed will have to push interest rates higher.

The Fed has been hoping that slowing growth would reduce inflation. But so far at least, there isn't any evidence of that. If Wednesday's core CPI comes in at 0.4% or higher, stocks could suffer a strong sell-off.

In addition, keep an eye on housing starts, which will also be announced on Wednesday. The housing market has been slowing faster than many on Wall Street had expected. Anything less than 1.8 million starts will contribute to Wednesday's stock market sell-off.

Barbara Marcin on MoneyMasters

Barbara Marcin is the current guest on my MoneyMasters video program. She manages the Gabelli Blue Chip Value Fund, which focuses on large-cap value stocks that are temporarily out of favor.

It sounds like a boring way to invest, but it's been very effective. Her portfolio has outperformed her benchmark, the S&P 500, every year but one since she began managing it in 1999. So far this year, she is up almost 6%, which is well ahead of her benchmark.

She explains on the video why she is so fond of the financial sector right now. In fact, almost 22% of her portfolio is concentrated in this sector. Citigroup is her favorite financial services company.

We also talked about Sanofi-Aventis, which co-markets Plavix with Bristol-Myers Squibb.

For those of you in the Houston area, Daniel Frishberg, who does the MoneyMan Report for BizRadio is broadcasting this week from the Waldorf Astoria Hotel here in New York City. I co-anchored the program last night and thoroughly enjoyed it. He brought a number of his listeners up to New York with him and I enjoyed meeting many of them. Houston is obviously full of very sophisticated investors who are interested in a lot more than just oil. Although I've been to Texas many times, Houston is one city I have yet to visit.

How Soon Will Oil Hit $80?

I woke up this morning, turned on the radio, and learned that BP had begun a shutdown of the Prudhoe Bay oil field in Alaska, which will take 400,000 barrels per day off the market. It wasn't long before the phone started ringing. MSNBC wanted me to comment, and so did Here & Now, a radio program out of Boston that airs nationally on NPR.

Here's my take on the situation: Just a few short years ago, 400,000 barrels per day would have had virtually no impact on the market price of oil. That's because there was plenty of slack in the system. If you shut down production in one part of the world, some other country could easily make it up.

These days, there isn't as much slack. Oil prices have gone through the roof because of increased anxieties caused by falling slack and rising demand. In addition, many of the major producing nations are anything but stable. Iraq isn't producing anywhere near its potential, oil workers in Nigeria are constantly under attack, Venezuela's president is actively seeking ways to hurt the U.S. economy, and Iran is hinting it may use oil as a weapon in response to economic sanctions relating to its nuclear enrichment program.

Iran has also threatened to retaliate if Israel attacks Syria. One form of retaliation may be to restrict the flow of oil out of the Persian Gulf. When traders have this much to worry about already, the sudden and unexpected loss of 400,000 barrels per day of production is enough to push prices considerably higher.

OPEC says it has plenty of spare capacity to make up for Prudhoe Bay's loss. Even today, Saudi Arabia could easily make up the difference alone. The Saudis are probably producing about 9 million barrels per day, and could probably push that up to 11 if they had to. But the Saudis can't produce much more than that without significant investments.

Nonetheless, I have to wonder if OPEC sincerely wants to bring oil prices back down. OPEC officially expresses concern about elevated oil prices and how they may harm global economic growth and oil demand, yet member countries certainly don't seem to mind drowning in the flood of cash these high prices are bringing them.

As for the Strategic Petroleum Reserve, it's holding about 690 million barrels of oil. It takes about 13 days for that oil to reach market once President Bush gives the order to release it. If he's thinking of doing it, he should do it soon.

Losing 400,000 barrels per day of production will not cause any shortages. But it will cause oil traders to bid up the price. We are getting very close to $80 per barrel. That translates to about $3.20 per gallon for the national average retail price of gasoline, which is already at $3.04 according to the AAA.

The Fed Will Pause

Today's jobs report significantly increases the odds that the Federal Open Market Committee won't raise rates when it meets on Tuesday. Non-farm payrolls increased by just 113,000 in July, which was weaker than the 135,000-145,000 expectation. In addition, the unemployment rate edged up to 4.8% from 4.6% in June, and hourly earnings increased by 0.4%, which was slightly greater than expected.

The latest GDP report already provided strong evidence that economic growth is slowing. Today's data virtually guarantees no rate hike on Tuesday. However, like I said in the August issue of the Forbes Growth Investor, the Fed won't be pausing because it licked inflation. If it pauses, it will be because it is concerned that economic growth is slowing too much. This isn't something to cheer.

Although some economists are already predicting a coming recession, I still believe growth will continue. Unfortunately, it won't be at the healthy rates many had been predicting. That's one reason why I remain bearish on stocks.

I continue to believe high energy prices will cause significant problems in coming months. The good old days of $20-30 oil are gone. I have to admit I am surprised by how well consumers have held up so far with oil at $70. But I'm convinced prices this high will soon take a toll.

Perhaps the latest Starbucks report is a harbinger of things to come. Starbucks (SBUX) reported disappointing growth and the stock took a big hit. Management blamed it on too much demand for blended drinks that take a long time to prepare. That's unique. Growth slowed because demand was too strong. With gasoline prices pushing north of $3 per gallon, I suspect the real story is that consumers are wondering how much sense it makes to pay $16 a gallon or more for coffee.

For those of you who like to wake up very early, you can hear my comments about the Fed's upcoming meeting on Tuesday morning on ABC's World News This Morning. I'll be on about 4:30 am. Yes, it's live. No, I won't be drinking Starbucks.

Stocks Rally as Growth Slows

Today's unexpectedly low GDP figure caught many economists by surprise. The "advance" estimate for second quarter growth was only 2.5%. The figure didn't surprise me, however. After all, just a few weeks ago on Kudlow & Co., I predicted 2.5-3.0% growth.

I am surprised, however, by the stock market's reaction. We have slowing economic growth and rising inflation. Yet the market responds with a strong rally. Why? Because the latest GDP data increases the odds that the Fed will pause at its August 8 meeting.

Investors are being myopic. The end of interest rate increases is good news, but not in the face of slowing growth and rising inflation. The Fed may pause, but it's also likely to continue hiking rates in the near future if inflation keeps rising. I'll have more to say about this in the August issue of the Forbes Growth Investor. In the meantime, you can read Beware The Stagflation Set Up, which I wrote for Forbes.com.

One Reyes Leads to Another

Greg Reyes, former CEO of Brocade, is the first executive to be charged for options backdating by the SEC. Although this story was in the news for several days, I was surprised that no one mentioned that there is another high-ranking executive named Reyes in Silicon Valley. His name is George Reyes, the current CFO of Google. A little research on the Internet indicates that George and Greg are related. I pointed this out on Kudlow & Company last Friday and said we could see a huge sell-off in stocks if the backdating scandal were to spread to a company as prominent as Google.

Do I think Google is guilty of backdating options? It's possible, but I doubt it. So far, the companies being investigated appear to have engaged in this practice prior to the enactment of the Sarbanes-Oxley Act in June 2002. Google wasn't a publicly-traded company until 2004. The required Sarbanes-Oxley controls make it more difficult for companies to get away with backdating today.

Yet even if it's more difficult to do it now, that doesn't mean that no one is doing it. After all, it isn't even clear yet if backdating is illegal. Almost everyone agrees it is unfair and perhaps unethical, but until someone is actually convicted, it won't be clear if it is illegal. After all, there is no law on the books that explicitly bans backdating. So the SEC has to argue that backdating is equivalent to fraud. That may be the case, but it's up to the courts to make the decision.

What's Up With Dell?

Obviously, not much. In fact, the stock is down about 20% since I warned investors to stay away from it on May 18. (See Earnings Guidance Revisited.)

Even though the stock had already lost about half its value during the prior year, I was convinced it would move lower because on May 18 Dell announced that it would no longer provide earnings guidance. Here is Dell's exact statement:

"Dell ended its practice of providing specific quarterly guidance for revenue and earnings per share and said it would focus forward-looking statements on long-term specific company and industry factors influencing performance. Dell does expect financial results for the second fiscal quarter of fiscal 2007 to be similar to its first quarter results."

Eliminating guidance is an ominous sign. Even though some individuals such as Warren Buffet claim that eliminating guidance is good for investors, the truth is that the refusal to provide guidance almost always coincides with a period of slowing growth. Coca-Cola's shares, for example, have barely budged since Warren Buffett convinced its management to stop providing guidance more than three years ago.

Yet today Dell came out with a warning. It gave explicit guidance for second quarter revenue and earnings. Both figures fell short of analysts' expectations. At one point, the stock was down more than $3 per share in reaction.

So is Dell providing guidance or not? Perhaps it just wanted to clarify that results would not "be similar to" the first quarter. Instead, it has created more confusion.

Some companies have a policy of providing guidance. Other companies have a policy of not providing guidance. Dell's policy seems to be that it won't provide guidance, except when it does.

Middle East Hostilities May Cause Fed to Pause in August

The Dow is down more than 400 points thus far this month. No doubt, the selling was precipitated by the "new" war in the Middle East as Israel takes aggressive action to end Hamas and Hezbollah attacks.

In my view, the surprise is not that investors are selling, but that stocks are not doing worse. Even oil prices haven't really jumped as much I'd expect given the circumstances--at least not yet. The current level of violence, and the real potential to draw Syria and Iran into the conflict, could cause a much stronger sell-off in the markets. Oil could also go much higher. After all, Iran has often threatened in the past to close the Straits of Hormuz in the event of hostilities. Because so much of the world's oil must pass through the Straits, if Iran makes good on this threat, $100 per barrel or more would be a real possibility.

Readers of this blog know that I've been bearish on stocks for quite some time. My concerns have centered around high energy prices, rising interest rates, and the end of the housing boom. I remain bearish today. But if there is any good news, it's that I believe there is now a good chance that the Fed will forgo another interest rate hike at its August 8 meeting. Higher energy prices and further evidence of a slowing housing market may be enough to cause the Fed to worry more about an economic slowdown and less about rising inflation.

Estate Planning

Investors are focused on making money. Unfortunately, many ignore the need to properly plan for how their estate will be distributed after death. Fortunately, Warren Buffett's plan to donate approximately $31 billion to the Bill & Melinda Gates Foundation has suddenly made estate planning an issue of keen interest.

Yet some continue to believe that estate planning is of concern only to the very wealthy. They think the primary purpose of estate planning is tax minimization. As long as the value of their estate is below a certain level, they believe there isn't anything to worry about. And since it looks like Congress will raise the tax-free limitation on estates, such thinking is likely to become even more entrenched.

However, tax considerations are not the only reason to have an estate plan. For example, an estate plan includes a will. If you were to die without a will, your survivors would have to deal with probate. Not having a will means that you are choosing to allow the courts to decide who gets what. What's worse, probate can take a substantial amount of time, and it could end up costing more than a good estate plan would have cost in the first place. Furthermore, while an estate is in probate, the heirs don't have access to the assets.

Yesterday, I had an interesting discussion with Anthony Barsamian, Managing Partner of Hutchings Barsamian, a Wellesley, Massachusetts law firm. Anthony specializes in estate planning. We talked about revocable living trusts, the House bill to raise the tax-free limitations on estates to $5 million, how much it costs to create an estate plan, etc. This MoneyMasters interview will be available for viewing tomorrow, July 13.

More Evidence of a Housing Slowdown

The National Association of Realtors (NAR) puts out an interesting index, which until recently, received little notice. It's called the Pending Home Sales Index (PHSI), which the NAR has been publishing only since 2001. A pending sale is defined as one where a contract has been signed, but the transaction hasn't yet closed. Most analysts pay closer attention to existing home sales, which are also published by the NAR, than they do to pending home sales. Yet pending sales are a good indicator of what existing sales will look like one or two months later. This is because pending sales typically close within that period.

Today, the NAR released the preliminary PHSI for May. There was good news and bad news. The good news is that the index was up 1.3% from the revised April figure. April was down 3.6% from March, so it appears that activity stabilized. In fact, today's report puts an end to three consecutive monthly declines in the index. The bad news, however, is that the May figure is down 10.1% from a year ago. That's a little better than the 11.7% year-over-year decline in April, but that's no consolation. The index is closely approaching levels not seen since 2003.

While existing home sales are still healthy, they are well off their 2005 peaks. Indeed, full-year sales for 2006 are likely to fall below 2004 levels. Furthermore, inventories are growing rapidly. There were 3.6 million homes available for sale in May, 41% more than in May 2005. We also know that new home sales are slowing. Several homebuilders are now offering incentives in a rapidly slowing market. So far, home prices are holding up fairly well, yet I have no doubt that prices will be the next shoe to drop.

Shares of many homebuilders look extremely cheap. They are off about 50% from a year ago, and they're selling for very low multiples. Nonetheless, I would still avoid this sector. A cheap stock can get a whole lot cheaper when growth is falling. In this case, growth is actually turning negative.

Strike Two on the SEC

Several years ago, when I was serving on the U.S. Advocacy committee of the CFA Institute (formerly called the Association for Investment Management and Research), we were invited to meet with staff members of the Securities and Exchange Commission to discuss some proposed regulations. At the time, the SEC staff had just finished an extensive paper on hedge funds. Largely because of the Long Term Capital Management blowup, there was pressure on the Commission to regulate these funds. Interestingly, the Commission's concern was not that these funds took too many risks, but that it was too easy for unaccredited investors to get into them.

An accredited investor is defined as one who has at least $200,000 in annual income ($300,000 if married) or $1 million in net assets. The SEC was concerned that some investors who didn't meet these thresholds were able to invest in hedge funds. There was also concern that perhaps the thresholds were too low.

It seemed to me that the solution was obvious. Instead of regulating hedge funds, the SEC could simply raise the thresholds that define an accredited investor. It could even peg the thresholds to inflation.

However, the SEC called for regulation. The commissioners voted along party lines. The two Democrats voted in favor of regulation; two Republicans voted against. Chairman William Donaldson, a Republican appointee, sided with the Democrats and hedge funds were required to register with the SEC and provide a minimal amount of information.

Well on Friday, an appeals court threw out the rule. While the court's reasoning may be complicated and hinge on legal nuances, it represents the second time that regulation introduced during Chairman Donaldson's tenure was set aside. The first had to do with the mutual fund independence rule that required that at least 75% of a fund's board, including the chair, be independent of the management of the fund. Mr. Donaldson sided with the Democrats on this issue as well.

At the time, I wrote in the Forbes Growth Investor that as an investor, I'd feel more comfortable knowing there was a critical mass on the board who was familiar with the management of the fund. While having some independent board members may be a good idea, 75% seemed ridiculously high.

I discussed both hedge fund regulation and the mutual fund independence rule just last week with former SEC Chairman Harvey Pitt. Interestingly, he said he didn't think we need more regulation of hedge funds. He felt we just need better regulation of the relationship between hedge funds and their investors. He also had some interesting things to say about mutual fund independence. This discussion took place on my MoneyMasters video program. I wish we could make it available to you sooner. Unfortunately, it won't be posted for viewing until Thursday, June 29. Please take a look at that time.

Technicals Look Good. Fundamentals Do Not

Given the market's recent weakness, it's good to see today's strong rally. The bull market that began in March 2003 is still intact as the S&P 500 continues to set higher highs and higher lows. Although the index is below its 200-day moving average, it has broken below this level and rebounded back several times during this bull phase. So on a technical basis, the market still looks good. In fact, the S&P 500 will have to close below its October 2005 low of 1176 to break this trend.

Today's rally is being credited to the positive earnings reports issued by Morgan Stanley and Federal Express. Of course, all rallies and sell-offs must be credited to or blamed on something. However, we really won't get a firm handle on what corporate earnings look like until the third week of July when second quarter results start pouring in.

On a fundamental basis, I'm still concerned about the market's overall health. I continue to focus on the Big 3: interest rates, energy prices, and housing. The Fed is still pushing through rate increases, energy prices remain stubbornly high, and the housing boom continues to fizzle. The combination of these three factors is what really worries me. Yes, stocks are way up today, but so is oil. Right now, it's up about 90 cents per barrel. Gold is up, too--about $10 an ounce. The yield curve is inverted between two and 10 years, and the 30-year bond is yielding exactly the same as the two-year note. These are not encouraging signs. Neither is it encouraging to see that the best performing stock year-to-date in the Dow Jones Industrial Average is General Motors, a company that lost more than $11 billion over the past 12 months.

The Fed makes its next announcement regarding interest rates on June 29. Almost everyone expects another quarter point hike. As usual, however, what the Fed says in the statement is what will really move the markets. Any indication that further rate hikes will be needed to fight inflation could result in a sell-off.

Eating Salad at Delmonico's

I'm wrapping up a fun but exhausting week. It began with lunch at Delmonico's, which is one of the oldest restaurants in the U.S. It is located within a short walk of the New York Stock Exchange. I was meeting with two real estate investors. One immigrated to this country not too long ago, but has already made a respectable fortune through sale and leaseback transactions. These guys are somewhat bearish on residential real estate, but still bullish on commercial real estate. Interestingly, they are also interested in opportunities abroad. I'm a little embarrassed to say that I ate nothing but a salad at one of America's most famous steak houses.

Then I was off to Wayland, MA to play golf with a venture capitalist, a private banker for U.S. Trust, and an attorney who specializes in estate plans. I also met Luis Tiant, the former great Red Sox pitcher famous for contorting his body into knots before releasing the ball.

Toward the end of the week I interviewed Harvey Pitt for my MoneyMasters video program. This will go live on July 29. Chairman Pitt was very forthcoming on a number of key issues currently occupying the SEC. He expressed opinions on backdating options, expensing options, hedge funds, mutual funds, etc. He pointed out that even though a number of corporate executives have gone to jail, no one has been convicted for violating any of the Sarbanes-Oxley provisions. He also spoke none too kindly about the Financial Accounting Standards Board (FASB). It's a fascinating interview and I strongly encourage you to watch it on the 29th.

I was also interviewed myself for the The Leon Charney Report, which airs in the New York City area. We talked at length about the economy and markets. My interview airs this Sunday, but you can also watch it soon after on Leon's website.

Finally, my MoneyMasters interview with hedge fund manager Renee Haugerud is currently available for viewing. Renee manages about $675 million in a commodities-based global macro fund. She said she thinks we're in for a period of inverse stagflation, a new theory she explains at length in the video.

Buybacks Don't Fool Investors

Today's Wall Street Journal has a front page article about the record amounts of share repurchases and how they are upwardly biasing reported earnings per share. By reducing the share count some companies are making the growth in earnings per share look real good despite much more meager growth in absolute earnings. The WSJ references a study by Standard & Poor's Howard Silverblatt. Of course, Howard already discussed all this two weeks ago on MoneyMasters. I suggest taking a look if you haven't yet seen the video.

Furthermore, Howard and I also pointed out that an increasing proportion of net income is being generated from interest rather than operations. While it's nice to get a boost from interest income, investors should worry when industrial companies aren't producing more from operations. After all, these are not investment companies. If you like interest income, it's much cheaper and more efficient for you to generate it yourself by purchasing CDs and the like than to have a corporation do it for you.

The WSJ also pointed out that despite all these buybacks, some companies aren't even reducing their share count. This is because their executives are exercising stock options, which results in more shares outstanding.

This may be yet another factor contributing to recent market weakness. After all, it's not just the quantity of earnings that count. Quality matters, too.

By the way, I mentioned in the last issue of the Forbes Growth Investor that I expected to post a MoneyMasters interview with Harvey Pitt on June 15. This has been postponed to June 29. Mr. Pitt traveled all the way to New York from Washington last week to film our segment. Unfortunately, his plane was extremely delayed due to bad weather. He has graciously agreed to make another trip. Let's hope we get better weather this time.

Forbes Roundtable Discussion

As mentioned in yesterday's posting, we held a Roundtable discussion last night here at Forbes Inc. Headquarters. The timing couldn't have been better. We began our discussion just half an hour after the markets closed. The Dow sold off 200 points at least in part due to Ben Bernanke's comments about inflation and a slowing economy.

Barbara Marcin wasn't too concerned about an economic slowdown. However, she favors large-cap dividend payers, which are typically the kinds of stocks that hold up best in a bear market. Chuck Brunie was very concerned about central bankers around the world mopping up liquidity, which could be bad news for investors. Liz Ann Sonders turned bearish a couple of months ago. She believes there is a good chance we could see a fairly strong market sell-off. Mike Holland said a sell-off wouldn't surprise him. However, he was more sanguine about the economy. While he believes economic growth will slow, he doesn't foresee a recession. Although some participants were short-term bearish on stocks, all were long-term bullish. They believe a strong market sell-off will be a good buying opportunity. Despite yesterday's 200-point drop in the Dow, everyone agreed the sell-off hasn't yet occurred.

We will transcribe and edit the comments for clarity. Then we will make them available to all subscribers to the Forbes Growth Investor and Special Situation Survey investment newsletters. This process will take a few weeks, so please bear with us.