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John Rutledge Says Economy Strong; Housing Market Slows; Stocks Of The Year; Stocks Could Be Strong Next Year; 2005 Turbulent For Energy Sector

Aired December 24, 2005 - 13:00   ET


RANDI KAYE, CNN ANCHOR: There is much more ahead on "CNN Live Saturday." IN THE MONEY is next. But first let's take a look at what's happening now in the news.
The "New York Times" reports that the National Security Agency has conducted much broader warrant list surveillance of e-mails and phone calls and the Bush administration is acknowledging. The "Times" says telecommunications companies helped the NSA gain access to streams of domestic and international communications without court orders. CNN is working its sources from the state department to the White House and business contacts as well and when we have more information on the "New York Times" story we will be sure to bring it to you.

U.S. Defense Secretary Donald Rumsfeld is in Mosul, Iraq, this Christmas Eve talking to U.S. troops about their mission. He also met with U.S. and Iraqi officials. His visit comes amid more violence. Insurgents killed eight people in Baghdad today. Three others died in Baquba and a U.S. soldier was killed elsewhere in northern Iraq.

Those are the headlines. More news as it happens. "IN THE MONEY" is next.

SUSAN LISOVICZ, CNN ANCHOR: Welcome to IN THE MONEY. I'm Susan Lisovicz sitting in for Jack Cafferty.

Our focus today, the investment outlook for the New Year. Just ahead a weather forecast for your cash, as Ben Bernanke gets ready to take over as fed chairman, see if the U.S. economy look sunny or stormy for 2006.

Plus house calls, find out where the real estate action is in the New Year with the cheerleaders or the doomsayers.

And fuel for thought. We'll look at whether the energy sector is set to go high or dry in the months ahead.

Joining me today, a couple of IN THE MONEY veterans, "Fortune" Magazine editor-at-large Andy Serwer and managing editor Allen Wastler. Guys, it's that that time when of year when we get all reflective about the year that has just about passed us by and if I had one word to sum it up, disaster. Whether it's man made or weather made.

ANDY SEWER, EDITOR-AT-LARGE, "FORTUNE" MAGAZINE: That's interesting. The biggest business story of the year was the biggest story of the year which wasn't a business story and that is natural disasters and the weather, of course, we're talking about the tsunami which actually happened in the previous year, but carried over into this year and the hurricanes and ...

LISOVICZ: Earthquake in Pakistan.

ALLEN WASTLER, MANAGING EDITOR, MONEY.COM: Yes. I'm surprised at "Time" Magazine went with the humanitarian giving, the year of the natural disaster and just ...

LISOVICZ: And the implications of ...

WASTLER: And the ripple effect we're still feeling it now and we'll probably feel it all the way through the coming year.

SERWER: I think what's interesting here, of course is not just the actual tangible effects of these disasters, the huge dollar amounts and the incredibly devastation to the human toll, if you will, but just the feeling that we are susceptible to these thing. We are not almighty. No levee, no dam, and no buoy system no mosque, no church is able to withstand these disasters and it really makes you think, I think --

LISOVICZ: It's humbling.

We should also just mention briefly the man made disasters, the airline industry which continues to struggle with four of the major carriers in the U.S. are still in bankruptcy, have been in bankruptcy and of course, the big three. A story that we continue to follow.

SERWER: And Delphi and the whole business there.

LISOVICZ: We're setting the table, certainly for our next guest. Lets face it the language we use to talk about the economy is plain boring, housing starts, GDP; you could tranquilize an elephant with that stuff. The thing is behind those dry words there's real drama like people struggling to get keep a roof over their heads or maybe get a better roof.

This edition of IN THE MONEY is all about that drama and how to play out in the New Year. For the big picture on the economy we are joined by the John Rutledge he is the chairman of Rutledge Capital, an investment firm. It's good to see you John, and it is good to talk to you, somebody who certainly has come through very well in economic cycles both bullish and bearish.

I think one of the things despite all of the barrage of bad news that consumers and corporations were hit with in 2005 you have to say resilience was something that was another catch word for the year.

JOHN RUTLEDGE, RUTLEDGE CAPITAL: Absolutely. The U.S. economy is stronger than crab grass. Nothing can kill it. It's doing fine now. It's going do fine next year. Fear is what's keeping people out of the market and they're making a big mistake. SERWER: Hey, John. I know you think we have a Teflon economy going here and crab grass economy to coin your phrase, but come on; eventually all of this stuff is going to catch up with us. Energy prices, deficits, terrorism, bird flu's going to get you. I mean at some point aren't things going to fold up here?

RUTLEDGE: Well, I hope every believes that because they'll sell me their stocks at a lower price. This place is growing at a 4 percent rate. Profits are raising more than 10 percent rate; interest rates are staying down below 5 percent. Inflation rate is probably going to be 2 percent next year. This market is the best market you're going to see in your lifetime.

WASTLER: OK, John. In the past couple of years now the housing market has been the main driver and a lot of people are saying that's where the consumers are getting their strength and where everything's rolling forward. Now some people are saying it's tanking. Do you agree with that? Is that where people should be putting their money? What kind of investments should we be thinking about?

RUTLEDGE: The housing market is not going blow up the prices went up because interest rates came down so much. Interest rates are not going up much more than they are today. I think housing will just go flat on people, but stocks have always been a better investment than houses anyway and stocks are going to be real estate over the next five years. I'll bet you make 10 percent a year or a little more in the stock market and you'll make between zero and three percent a year in the real estate market over that time.

LISOVICZ: Well you have such a Pollyanna view of everything so far, but not about unskilled workers in the U.S., right, John? I mean you think this is the terrible time for them unless they start learning, say mandarin?

RUTLEDGE: You know the good news for investors is the bad news for unskilled workers. There are really two investor stories. One is people have been afraid ever since 9/11 and the bird flu is just the most recent fear. They're staying out of the market.

That keeps the prices low, but the fundamentals are very good, too. In fact, you can move capital from anywhere to anywhere in the world today at almost no cost. That means the owner of the tools has tremendous choices, but they're moving those tools from the U.S. to China.

So China's growing fast. American unskilled workers are paying the price for it. That's why we see the political reaction in the trade wars going. It's because these people need a future. The only answer to that is education.

SERWER: John, I know you're not a professional warologist, but I notice here that you're not terribly sanguine about the situation in Iraq and you see that as being something that can rain at least on President Bush's parade. That downbeat about the situation are you?

RUTLEDGE: I think President Bush has done a great job on the economy and I think he's done a terrible job reacting to the situation in Iraq because of all of the recent stories about spying and so forth. We are paranoid and we don't need to be. Iraq, however, is a big mess. It's a mess not because of what we've done, but because they're sitting right on top of this massive pile of wealth we call oil reserves and they don't have enough of their own strength to defend it.

I tell you, that's not going change, which means somebody's army will be in Iraq for a very long time and only over the long haul as we develop other energy sources and move away from it into IT. Will that get better, but oil will be a big issue and Iraq is going to be a big issue for a long time.

WASTLER: OK, John. Another big issue of the past year, we've mentioned it a couple of times. Bird flu, are you worried about that at all?

RUTLEDGE: Bird flu. They have a term for this I like in China it's called boo shoo and it means almost what it sounds like. The bird flu is not a story about humans getting sick. There have been six people killed by the bird flu recently, 60 since 1997. We killed 35,000 people a year with the ordinary flu. The bird flu story that matters though is that it's killing chickens and ducks all across Asia and the poor farmers need them in order to feed their families.

We have political instability issues and poverty in Asia. We shouldn't allow bird flu to distract us from our real job. Our real job is that China is fast becoming the biggest and most powerful country in the world. We need a strategy for that. We need a technology strategy because China has decided to move away from energy toward I.T. and education.

Our education is falling far behind. We need I.T. strategy which means a new telecom law and we're not getting it. We have hopes next year, but those are long-term issues. I think near-term this market's great and there are some great opportunities in different parts of the market and sectors.

LISOVICZ: Another near-term story that I don't think you think will be classified, as boo shoo, if my Chinese serves me correctly is the expiration of a dividend and tax cuts. That's up for vote next month.

RUTLEDGE: Absolutely, you know the house and Senate are going to have a conference in January. I believe they will include the dividend and capital gains cut in their bill and I think that Congress will pass it and it will be signed into law. That's very important because since I worked on the dividend tax cut with the White House three years ago the market is up $4 trillion and more than 40 percent.

We've created almost a volcanic eruption where you make a return differential between dividend paying and non-dividend paying assets. People have been buying the dividend payers and it's made tremendous increases in stock prices. People's net worth in America is now worth more than $100,000 for the first time ever. LISOVICZ: So John Rutledge who has advised both the Bush White House and Reagan White House, chairman of Rutledge Capital. Happy holidays and you think it will be a Happy New Year. Thanks for joining.

RUTLEDGE: Thank you very much.

LISOVICZ: When we come back. Real estate roulette. See if the New Year is the time to turn your home into cash or hang on for the big money.

Also ahead, Wall Street celebrities. Stick around and find out our pick for the most notable stocks of 2005.

And the next best thing to having your own personal money manager. We'll ask one Wall Street sharpshooter to tell us which stocks he's watching for next year.


LISOVICZ: 2005 got underway with predictions of the housing boom was just about over and it ended with some numbers suggesting that those predictions might just be right. But before you call your real estate agent, stick around and hear what next year is looking like. Chris Mayer is the director of Milstein Center for Real Estate at Columbia Business School here in New York. Welcome.

We have seen signs that the real estate market is slowing down, but not that much. The most recent numbers we got in housing starts shows the fourth best month on record, building permits which is considered a good sign for the months to come also better than expectations. So what's your forecast for '06?

CHRISTOPHER MAYER, COLUMBIA BUSINESS SCHOOL: I still think we're going to see a slowdown. Sometimes when there's an upturn in interest rates, there is kind of a burst of people that jump into the market to sort of get in while the getting is good. So I think we're starting to see the numbers bounced around a little bit as opposed to starting to grow and I think that's going to be a prelude to a slowdown in 2006.

SERWER: Chris, you know everyone's warning people about real estate, but aren't the rules kind of really simple? Number one if you don't speculate and number two if you buy a house that's not way above your means you're going to be just fine. It's that simple, isn't it?

MAYER: Yes, I actually think it is that simple. You're buying a house to live in, you're not buying a house to invest in and I think most of the single family housing markets in the country while a little bit expensive are not out of line with what people can afford to live in. So I think most homeowners have actually incorporated that advice.

WASTLER: So, Chris regarding next year where are the trouble points that you see? Is it one big national bubble we have to worry about? Or is it tiny bubbles that the Fed's been talking about a little bit or different sectors? Where are the bad spots?

MAYER: My concerns in terms of parts of the country are particularly South Florida and to some extent southern California, but I would also say they think the biggest problems are likely to be in condominiums and there, I think we are starting to approach signs of being as close to a bubble in that part of the market as in any other sector.

LISOVICZ: And so, Chris, just to clarify. You're talking about just overbuilding. There's just too much stuff in these markets.

MAYER: I think to some extent there's been overbuilding and this is where investors have been playing a big role is buying condominiums with the view of flipping or renting them out for a couple of years and then selling at big capital gains, but also condominiums, the pipeline of condominiums and even the new construction numbers we saw are really reflecting a lot of multi-family homes being constructed and I think this will eventually out build the market at the price levels we're seeing.

SERWER: It's one of these new national blood sports like watching to see which movies did well over the weekend. It's funny how these things change.

Another fundamental thing and I'm into fundamentals as you can tell is interest rates. I mean interest rates really drive this business. Interest rates have been low. If they are going to stay low we're OK, when they go up, bad things happen in this business, correct?


And I think interest rates have been the key driver. I know you've heard this a thousand times for why housing market has been so strong and if we were to see interest rates go up more than the market is currently anticipating, I think we would really see the housing market get hurt and particularly in markets in the northeast and California where we've seen the biggest appreciation in the last boom.

WASTLER: So, Chris, what about commercial real estate? We've been talking a lot about family homes and that kind of speculation. Is there speculation going on in commercial real estate? Is it the subject of the same problems that you're forecasting?

MAYER: I think commercial real estate really has gotten overheated. If we look at the public markets real estate investment trusts are trading at record prices then in fact what we're seeing including another announcement yesterday is the public companies being taken private by these private funds and I think they're paying prices that are going to make it really hard for investors to get what I think investors should be getting for vesting in commercial real estate.

So I think the prices there are too high.

LISOVICZ: Yes. I mean it has always just boggled my mind that you see new construction, new malls going up where you see vacancies just down the road, but I guess if developers think there is money there they will build.

Let me ask you another question about rent. About is this a good time with interest rates continuing to rise. Is it a good time to in fact, maybe hold off on a purchase and also if you own a second property, what are the prospects for renting? Are you getting the prices that you necessarily are trying to get?

MAYER: On the rental side, what I look at in terms of interest rate is the long-term mortgage rate and the long-term mortgage rate has bounced around this year, but isn't a lot higher, 25 or 50 basis points relative to where it was a year ago. Short-term rates have gone up a lot, but most homeowners focus on the long rate.

So I think in terms of buying and renting you're not getting a bargain buying right now, but at the same time if you're going live in a place for five or more years, the benefits of owning a home from the tax benefits from the non-pecuniary ability to do what you want with the house, those things make buying still a really attractive option.

On the rental side, I think people who are looking to buy to rent are really seeing continued pressure on rents. I think we're going to see some rent growth this year, particularly in this coming year relative to what we saw some year, but I still think we're not really looking at a period in apartments, at least of rents that are growing very quickly. We're just seeing too much construction still.

SERWER: Chris, quick last question, even if you live in the snowmelt, say Syracuse or Green Bay, houses is a good investment? Do they keep up with inflation does it make sense to own?

MAYER: It really depends where you live. If you live in the south, places like Texas, housing has actually grown slower than inflation in the last two decades, two and a half decades. If you live in places in the Snow Belt, we've seen housing keep up with the price of other goods; maybe go up a little bit.

I think in places like that you're buying a house and what you're going to get out of the house is really living in it. In other parts of the country you also get to live in your house but of course you're also expecting a capital gain and that's primarily drive on the coasts.

SERWER: All right. Questions we will certainly be revisiting over the coming months, I'm sure. Chris Mayer is the director of the Paul Milstein Center for Real Estate at the Columbia University of business school.

Thanks for being with the program.

Coming up after the break movers, shakers and moneymakers. Find out about our picks for Wall Street's stock of the year.

Plus, the stuff that spins your wheels. After a year that saw gas prices go all over the map, see how the energy sector looks for '06.

And mouse bait, Allen Wastler will have his prediction for the hottest spot on the Web in 2006.


SERWER: As we bring 2005 to a close, we thought we'd talk about some stocks of the year instead of a stock of the week. On the positive side this year there was no contest. Google wasn't only the super stock of 2005; so far it's been the stock of the century. Google started the year at $200 a share and now it stands at $440 a pop. More people are using the search engine as their portal to do everything on the Internet, but can Google keep it up in 2006?

You know, I don't know if there's ever been a stock in the history of Wall Street that's gone through 200, 300 and 400 in one year like that. That in itself. I keep saying what goes up, must come down and it surely doesn't follow the law of physics so far, right?

WASTLER: No it keeps, it's capturing a lot of the trends, you know? And search is a big trend and advertising search is a big trend. The question is can they keep that up into the New Year? They're sort of showing signs of becoming a more mature type of company going back to old tried and true. Witness buying a piece of AOL. They did that as a blocking move against Microsoft. That wasn't really an organic creative thing. That was flat out, we got the money and we'll block you from doing this.

SERWER: And I actually heard that Yahoo! is actually beating it out in something called community-powered search. Something that means nothing to me, but the fact that there's lots of other big players with resources that are thinking of ways to sort of outmaneuver Google.

SERWER: Big question is that they are going to split the stock.

Let's talk about Apple a little bit, you guys, here's another super stock. Steve Jobs underestimate him and your peril, right?

WASTLER: Oh, yes. I love it. I am absolutely ...

LISOVICZ: I got an iPod.

WASTLER: Everybody I've met who is like resisted the change saying I don't want to get into the Apple monopoly; their products are just so good. And once you are in that monopoly ...

LISOVICZ: And they're easy. They're easy to use.


LISOVICZ: Attractive.

SERWER: You know what that old business school thing, is cannibalize your self or some competitor will and that is what Steve Jobs has done. Look at that stock chart; he cannibalized his own product instead of waiting for Sony to come out with a better product. He came out with a better product.

LISOVICZ: Is Apple going come out with a phone? Because phones are doing so much now and Motorola has had great success this holiday ...

WASTLER: Look at the advertising the guy is talking on the cell phone and all of a sudden he clicks from music to call. I'd go for that.

SERWER: All right. There were some dogs, of course. Yes. What about Merck here? This is a company facing just problem after problem after problem, right?

WASTLER: Yes. Right and Vioxx isn't going to cure it.

They have all these lawsuits hanging over. They have pipelines problems. They've got good news lately with the cervical cancer drug, pushing it for another use. Look at that. Look at that chart.

SERWER: And you know what Allan I always say with these kind of things when you have the plaintiff's lawyer circling like that you have to be really careful because it could be a value trap, it looks cheap, well it is down a lot, but these guys will keep coming after the company for years and years, I think.

LISOVICZ: The verdict is I think it's still out on Merck because we don't have a verdict in the third case. Merck has said it has the resources and the resolve to fight these cases and there are about 7,000 of them on a case by case basis.

I guess the thinking is that ultimately if it gets a few wins it could bring the settlement costs down, but the fact is we just don't know how it's going go. The last one went to mistrial because among other reasons they didn't get some very damaging information against Merck, they couldn't consider it during the deliberations.

SERWER: Right well a lot of winners and losers there I hope you guys out there own some of the winners and I hope you own some of the winners for 2006.

Coming up on IN THE MONEY, Wall Street hotties. Vince Farrell knows how to make an investment dollar earns it's keep. Find out which company he's watching for 2006.

Also ahead, connecting what you've got in the tank to what you've got in the bank. Boone Pickens has his outlook for the energy sector.

And a new take on an old classic. Animated bunnies, try their hand at a favorite holiday flick. That's on our "Fun Site of the Week."


KAYE: Now in the news, President Bush is working the phones this Christmas Eve wishing trooping overseas a happy holiday and thanking them for their service. The president made the calls from Camp David where he's spending Christmas weekend.

Information now on a secret government program designed to prevent a dirty bomb attack in the United States. Several government officials tell CNN the FBI has been monitoring for suspicious radiation levels outside more than 100 predominantly Muslim sites in the Washington, D.C. area. Monitoring has also been done in other cities without warrants. The FBI says it does not target any specific ethnic group in its investigation.

Insurgent attacks claimed more lives today. U.S. military officials say three police officers were killed in a bomb attack in Baquba. In Baghdad eight people were killed, most of them shot to death. And in northern Iraq, a U.S. soldier died after being hit by a rocket-propelled grenade.

I'll have all of the day's news at the top of the hour, now back to IN THE MONEY on CNN.

WASTLER: If only you'd gotten that crystal ball you asked for last Christmas, not only would you have bet big on the White Sox, the Patriots and a little horse named Giacomo, but your stock portfolio would probably have looked different than it does right now. Well just in case Santa doesn't come through again this year, we have the next best thing. Vince Farrell, chairman of Scotsman Capital Management. He is going to play fortune teller for us. Vince, how are you doing?


WASTLER: Well, we've had about three years of a nice strong market going forward but some people are saying it will tank next year or at least pull back varying ranges, what do you think?

FARRELL: I'm kind of optimistic, Allen. I'll take a look at the third quarter of this year where oil was at a record high, interest rates were rising and we didn't know where they would go to and we had the hurricanes that the economy produced a four percent plus GDP and I think that the underpinnings of this economy are terrific.

I think we will continue to grow and I think the stock market is at reasonable valuations, not cheap, but it's reasonable. If you give an OK, economic environment and reasonable valuations. It can do very well for you.

LISOVICZ: Hey Vince, happy holidays to you.

FARRELL: Hey, Susan.

LISOVICZ: Glad to hear that you see the glass half full. One of your colleagues, Ralph Acampora, somebody who has certainly generated a lot of attention over the years says that stocks are going to tank in '06; I mean 20 to 25 percent, which would be a bear market. What do you say to that? FARRELL: Well, first, I've known Ralph for maybe 25 years. In fact, we were at dinner just a week or two ago. He's a terrific guy and I would respectfully disagree. What Ralph looks at the tea leaves and trying to decide where things are going to go, and maybe he is right. But I just don't see it. I don't see Corporate America with the balance sheet that it has and the consumer even though I expect the consumer to retrench so much because they don't have the equity cash out of the homes.

The consumer has over $50 trillion of net worth and I think on the other side of the equation again corporations will be spending on capital expenditures because they haven't done sufficient in the past few years, which creates job growth so I just see the overall economy doing well enough that it would preclude the stock market from tanking when it's trading at a reasonable valuation to begin with.

Stock markets tank, Susan, when interest rates are going up and you don't know how high they're going. They do not tank when the Fed is at the end of an interest rate hike cycle, which is where we're.

SERWER: Hey Vince, our producers were kind enough to send some of the stocks over that you like. And I got to tell you some of these are real bark jobs as in dogs, but I know you're supposed to buy stocks when they're cheap. I want to ask you about a couple of them. Let me ask you about The Gap. Have you gone into the store? I don't think there's anything in there to buy. I know the stock is down. What do you like about that one?

FARRELL: I got to tell you what I like about it; with all due respect to my friend Andy is that you don't like it. Everyone I mention it to doesn't like it, everybody says oh, my god. This is an extraordinary well-managed company that has shrunk the number of shares out standing, paid down debt in the balance sheet and has missed the fashion cycle, but this is the company that in the history of the franchise and it hasn't been this cheap in the past ten years.

Now of all the stocks that I have sent over this one has created the biggest controversy. I'm going to bet this is the best performer in 2006. Don't go out now during the transit strike to see if people are in Gap stores. Take a look at over the course of the year. Buy it with the canon roaring at the gate. And it is certainly roaring at the gate on this one. Which in my view, a value investor with risk war (ph) and that stuff is there's not a lot of risk because the bad news is very much priced into it.

WASTLER: OK Vince, how about Microsoft is on your list, too.

FARRELL: First time Allen I have ever owed it. And shame on me.

Except for the past few months when it's lifted off it's lowest. The cheapest it's ever been. It's generated $1 billion in free cash flow every month. They have $35 billion in cash on the balance sheet, between now and this time next year, a whole bunch of new products, which I think, will stimulate growth a little bit. The knock against it is that all of this is want a growth stock anymore. Exactly right, it is not a growth stock it is now a value stock and a value multiple and that's why I like it.

LISOVICZ: Vince, before we go on with one of your other picks, we should also say that you own the five stocks you're recommending.

FARRELL: Yes. All that we mentioned, I own, family owns, the firm's clients own so we eat our own cooking, yes.

LISOVICZ: BP, so one of the big, big energy stocks. Isn't it too late to get in here?

FARRELL: Absolutely not. No. The stock has done well for a couple of years but BP is trading as though oil was going to be well below $40. Now I don't know where oil is going to go. Nobody can guess that. I suspect it is going to be higher longer, but BP has been raising its dividends in 2006. BP is going to buy an $18 billion worth of stock. They're buying a billion a month and they have just sold their division. They're going to use that money as well.

So it totals up $18 billion as well as a big dividend. I think there might be better sectors in the market next year like technology for example might be better if I'm running this capital spending cycle, but I think energy will do just fine because the market's disbelieving that the price of energy is going to stay high and I'm convinced that it will.

SERWER: All right Vince; I'm going to ask you about another one of your members, or your dead money club.

Citi, you know Chuck has something to make this baby move.

FARRELL: You know, Andy what you want to do is you want to buy the stuff that's been dead. You don't want to buy the ...

SERWER: You're right.

FARRELL: You won't want to buy Google in my opinion. I might be wrong on that, but I don't think you want it. I think you'll want to buy the stuff that is going to do well tomorrow. Not the stuff that's done well yesterday. You get in a well above market yield Citi, 3.5 percent, trades at 11 times earnings, and they make money a zillion of different ways.

I think the issues with corporate governance and shame on them are behind them. I think at 11 times in a market that's trading at 16 times with a 3.5 percent dividend yield that will get raised double digit every year for the next few years.

Your risk is very low and you are reward is better than your risk and I'm not saying this is a Google or anything like that. What I am saying is your going to get an acceptable rate of return in 2006 on the stock.

WASTLER: Real quick, Vince, your last pick is GE. Explain that one. FARRELL: Mr. Melthow (ph), who I have very high regards for, said they are going to grow earnings 12 to 17 percent a year after a couple of years of pretty flat performance. The stock traded 18 times. So let's take the midpoint. Suppose they're going to grow earnings at 15 percent.

They're going to grow the dividend in line with earnings and the dividends above market average right now at a 2.5 percent. If I could buy at 15 times plus 2.5 percent for 17.5, the stock trading at 18 times I think again, my risk reward ratio is very well balanced and I think I'll do terrific.

WASTLER: OK Vince, well thanks a lot for stopping by and sharing all of that with us.

FARRELL: It is good to see all you guys. Thanks.

WASTLER: Happy holidays.

Vince Farrell of Scotsman Capital Management.

Now we are going to take a quick break, but there's more in store for you on IN THE MONEY. Up next, you give enough to the oil business. So maybe they ought to return the favor. Boone Pickens will tell us if oil looks like a solid investment in 2006.

Plus the do it yourself encyclopedia. We'll tell you why you'll be hearing more about it Wikipedia in the New Year.


SERWER: 2005 was a turbulent year for the energy sector. Hurricane Katrina and her storm siblings rocked a market already made shaky by geopolitical strains and growing demand. So can we expect a steadier year in '06? Boone Pickens is founder of BP Capital and one of the shining lights of this business. He joins us now from Dallas, Texas. Boone welcome back to the program.


SERWER: Let me ask you; are we in a normal cycle here? I mean you have seen a whole bunch of them, you know exploration and production companies ramping up. Someone told me the other day 50 new ones in the UK alone over the past few months have been founded to develop more in the North Sea. Is this something you've seen before is it a normal cycle?

PICKENS: It's -- when prices go up, you're going see more companies come into the industry, but the part that's different than we've ever seen before is I believe that we have peaked on our oil production normally -- you know, I've been here for quite a while in this point -- but 185 million barrels a day is about what the world can do, and I don't see how you can get it much higher than that.

And if that is the case, then if demand is growing as we believe it is in China, India and other places around the world that the trends is going to be up as far as demand's concerned that should bring prices up also. Now, having said that, I think that you're probably going see a pretty lackluster first half of '06.

LISOVICZ: Right, but I mean, '06, but within a few years, we are, by some estimates, Boone, it looks like we're not going have enough oil. Right now I see global demand, $82 million barrels per day, within few years, with in about five years 111 million barrels per day. Global demand because of China and India. How do you get that? Where do you get it?

PICKENS: I don't think you do and I think that global demand next year will probably be something like 83 or 84 million barrels a day and so you're stretching supply, you know, really truly to a breaking point. And if you're talking about demand being up to 111 million barrels a day, we can't supply that. What does that mean? It means that prices are going go up and I think the price will kill the demand is the way it's going work.

WASTLER: Mr. Pickens, what about technology improvements? I hear a lot of people say we have supply problems but we have technology in the pipeline that will stretch that barrel of oil further. Are you discounting that?

PICKENS: Well, there's no question that technology is helping us, but if you're talking about a breakthrough, you know something that would be monumental. That isn't going happen. There's no question that a refinery built today would probably be more efficient than a refinery built 30 or 40 years ago, even though they've made improvements throughout those 40 years. Its just technology is just not going to solve the problem.

SERWER: We should point out, I think, that your peak theory and there are peak theorists out there as they're called are somewhat controversial. There are people who disagree who think there's plenty more oil to be discovered. I want to ask you; don't you think this is all going to settle out in some sort of equilibrium?

This is a business where higher demand increases supply because when the prices go up, things become more economical in terms of oil shale, in terms of the oil sands and all those kinds of ways of getting things and also more expensive oil becomes more economical to drill as well. So maybe demand tapers off. Maybe we'll get some more oil and maybe prices go up and everything is just ducky right?

PICKENS: Well, U hear what you're saying and that is a -- I think that's a theory that a lot of people believe. I just go back to my 85 million barrels. I think that's all you can do. You say, well, they'll put more money into exploration. Maybe they'll be more serious about exploration or whatever could happen to increase supply, but those prospects have been drilled.

I had a conversation the other day with the major oil company geologist that is not as old as I am. And I'm a geologist, but he's had more worldwide experience than I have. And I said, Jerry, I said if you ever gone any place in the world to look for oil and soon after you got there you found out somebody had already been there and he said never. And what I'm saying is that we pretty well looked at the world. Are there going to be some big oilfields found in the future? Not many.

LISOVICZ: So Boone, I guess it really begs the question, then. Supplies are tight. Oil has squeezed consumers and it certainly cut onto corporate profits and it certainly influenced you as foreign policy and it's damaged the earth. Isn't it time that we developed a different source of energy. You see BP Amoco and Exxon Mobil talking about it at least in their ads, alternate sources of energy. We're in the 21st century now. Where are we along in this process?

PICKENS: Well, before I answer that, let's look at the hydrocarbon era, which started with the automobile about 1900. We are now half way through all of the reserves I think that will be found. We are half way through 2 trillion barrels of oil in the world. We have, say another hundred years and if you just straight line that you would exhaust the rest of the oil in the world.

It won't work that way because you'll transition into what you just said. You are going transition into amount native fuels is way it's going work, but I do think it's going to be somewhat. It won't be an abrupt, you won't hit the wall. I don't see that happening. I think you'll demand or will be stemmed by higher prices and you will then start to transition into other alternatives and it will all fit together is the way I see it happening. But the trend -- the trend is higher as far as price for fuel.

LISOVICZ: So you have to bite the bullet for the meantime. But you think it will all fit together in the near future. One would hope.

Boone Pickens, founder of BP Capital. Good to see you, happy holidays.

PICKENS: Thank you. Merry Christmas to you.

LISOVICZ: And to you as well.

Coming up, not enough time to watch your favorite holiday movies? These bunnies have cut them down to 30 seconds flat. We'll show you how they did it on out "Fun Site of the Week". Now that you have some time back in your day. Drop us a line the address


LISOVICZ: The online encyclopedia Wikipedia has been in the news lately because of questions about its accuracy but sometimes-bad publicity can be better than no publicity at all. That's Alan Wastler's take in his "Inside Out." And you know I mean some of the accuracy and when you get something wrong Wikipedia got it spectacularly wrong.

WASTLER: A lot of people are hearing about Wikipedia now and if you're not in the been Wikipedia It's essentially an online encyclopedia. That is written by people using the Internet. Volunteers will just go in and say I know a lot about vegetables. So I'll write an item about vegetables in there and other people can say, you didn't get the Brussels sprouts right and let me change that there for you.

LISOVICZ: But the mistake involves an assassination.

WASTLER: Defamation. A man named Johnson, who used to work with Robert Kennedy, somebody went in and they found out whom eventually and wrote a very libels (ph) and defamatory entry about him and practically accusing him of being part of the assassination. It was just ridiculous.

So he wrote an op-ed piece in the newspapers and people started hearing about Wikipedia. They responded by saying well we'll change this and use registered users. Then "Nature" Magazine came out and said well the items on this aren't too bad and someone went in and vandalized those. It has been back and forth, back forth. So they are going to have to change it.

Inside out on this, it points out there is a need for this kind of service. People are interested in having an encyclopedia access on the net. That's one. Two, the value of the quality of information. So all of a sudden with that value so you the transfer from voluntary to maybe something that you can make a little money off of if you get it right going forward. To that point if you go to Wikipedia right now they started a fund drive for people to donate money to help the organization.

SERWER: I think Wikipedia is actually a terrific resource. You have to be careful about it sometimes a little bit and what I recommend everyone to do is check out the Jack Cafferty entry. He's in Wikipedia. Of course.

LISOVICZ: Just one question, is it accurate or not?

SERWER: I think so. I'll have to let Jack be the judge of that.

LISOVICZ: OK. So we'll change the tone then and the topic, too. "The Fun Site of the Week."

WASTLER: Fun site, fun. We have Christmas coming and the holidays and you're here. We love the bunnies. The bunnies will give it to you quick. Here, a holiday classic. Go, bunnies.


UNIDENTIFIED MALE: You'll get your wings. I'm going explore some day.

UNIDENTIFIED MALE: I'll give you something important. I'm leaving this crummy little town?

UNIDENTIFIED MALE: George, if you don't stay you'll go to Potter.

UNIDENTIFIED MALE: Potter, you are nothing but a scurry little slivery. UNIDENTIFIED MALE: The money's gone, George.



UNIDENTIFIED MALE: Is Andy in trouble?

UNIDENTIFIED MALE: I'm your guardian angel.

UNIDENTIFIED MALE: I wish I was never born. OK.

UNIDENTIFIED MALE: Mother, Mary, it's me! I want to live again. Mary!

UNIDENTIFIED MALE: My brother George, the richest man in town. Ring the bell. At a boy, Clarence.


SERWER: Man, that's quick.

WASTLER: That's my favorite.

LISOVICZ: They are favorite, right? They are. They keep coming back.

SERWER: The bunny-wabbits.

LISOVICZ: Thank you so much.

Coming up next on IN THE MONEY, you said it and we will read it. Stick around for some of out viewer e-mails from the past week and you can send us a line right now too. We're at


LISOVICZ: Now it's time to read your answers to our question about what was the best thing that happened to you in 2005.

Justin wrote, "The best thing that happened to me was having my brother come home safe after two tours of duty in Iraq." Amen to that! We can only hope more families experience that joy.

Kim in Maryland wrote, "The best thing started out looking like the worst. I lost my job just as I was trying to buy a house. But I got the bank loan anyway, and eventually got an even better job." That is terrific.

And Judith wrote, "The best thing that happened to me is I finally divorced my husband. He was a financial drain on my life for 35 years." Well she stuck it out for a while.

Now for next weeks e-mail question of the week, "What do you think will be the best investment in 2006? Send you answers to and you should also visit our show page that is where you will find the address for our "Fun Site of the week."

They didn't read my answer, which was working on this program with Andy, Allen, and Jack, our producers, our writers. Everybody, the crew. Thank you so much. Happy holidays everyone. Thanks for joining us for this edition of IN THE MONEY.

Thanks to "Fortune" Magazine editor-at-large Andy Serwer, and managing editor Allen Wastler. We will see you back here next week Saturday at 1:00, and Sunday at 3:00. See you then.



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