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Oil Prices Down; Economic Issues Finally Being Discussed; Best Investments
Aired July 19, 2008 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN HOST, YOUR MONEY: Welcome to YOUR MONEY where we look at the how the news of the week affects your bottom line. I'm Ali Velshi.
Well oil retreated from record high levels this week over concerns about U.S. demand. We're going do take a look at why prices dropped when our time behind the wheel does the same.
Plus, what it could mean at the pump. Stocks showed some strength as weaken response to sagging oil and better than expected earnings. Find out where you should have your money right now.
And high inflation and government bailouts, news on the economic front forces the president, his administration, and those seeking his job to speak up about the economy. Who's calming our fears and who's talking solutions? We'll have a look at that.
But first if you're confused about all the economic news that came out this week, don't worry, we all are. We've had a bank collapse, a government bailout of two key mortgage backers, a significant drop in oil prices and a market rally. Well to help us sort out the good, the bad and the ugly. I'm joined by Stephen Leeb. He's the president of Leeb Capital Management.
And in Boston, Art Hogan, chief market strategist at Jeffries & Company. Gentlemen good to talk to you, both of you. Art it's been awhile. Thank you for being with us. Let's start with you, Art. What do we make of this? We've had some strong, strong market days. Even the bad news that has come out this week and there has been lots of it. Seems to have been ignored by markets. What do you make of it?
ART HOGAN, CHIEF MARKET STRATEGIST, JEFFRIES & COMPANY: First of all you have to realize we've priced in a lot of worst-case scenario. For us to get a little bit of a bounce last week I think makes a great deal of sense. I think we get it a point where even a dead cat bounces when you drop it and I think to a certain extent you have oil go up from $147 and change to $130 and below, in two days basically. And that has to be looked at as positive and also you've got -- you've got Fannie Mae and Freddie Mac that were implicitly backed up by the government. Now explicitly backed up by the government.
In history and I've been doing this for 20 some-odd years never seen before the Senate finance committee the head of the treasury, the head of the Fed and the head of the S.E.C., talking about why it's important, what steps they are going to do to make sure things are not getting worse. VELSHI: Yes, there was definitely a fill-court press this week, Stephen. We had the president saying things were OK and we had Ben Bernanke saying well, there are some road blocks there. We had -- we had Henry Paulson saying he will back up Freddie Mac and Fannie Mae. What do you make of it?
STEPHEN LEEB, LEEB CAPITAL MANAGEMENT: Well, Ali, I think a lot of positives last week. I mean in addition to everything that Art said, there was also Wells Fargo, which is the largest bank, and I think the largest bank in California. Certainly the most important bank in California. And California has been one of the hardest hit states in this housing crises. Wells Fargo came in with earnings that were down but considerably better than expected. But, a big but, they raised their dividend 10 percent and that's their way of saying, we see everything getting better. We are now going to conserve cash. We're willing to give it to shareholders. Something else about Wells Fargo, its largest shareholder by far is none other than Warren Buffett.
LEEB: So anything that they did had to be blessed from Omaha. And Buffet is very interested in preserving you know the value of his investments. So you had Warren Buffett in effect saying to the markets, I think things are OK. I think this housing crisis is going to pass. And I think that's one thing the markets really focused on but it wasn't getting a lot of attention because of Fannie and Freddie.
VELSHI: Wells Fargo a big mortgage lender. Art, we started this week with news that started last week about IndyMac, this bank that had failed. And boy it worried a lot of people. I think by -- by Monday or Tuesday, the news had gotten out so far that people understood that you know what, their money is safe, if you divide up your money properly in a bank account but we're not used to hearing about a significant bank failing.
HOGAN: No, we haven't heard about that since the S&L crisis. We certainly you know have a short list of reasonable banks that may well fall into that IndyMac category and I think that's one of the concerns we will have to deal with over the next couple of weeks. The interesting thing as we work our way through the end the week, we got ness from Merrill Lynch, Citigroup and oddly enough Citi Bank although they reported a loss celebrated the number because it was better than expected. They sort of have their number. They have their loss from the last quarter. People are celebrating that. They're move next right direction. So Merrill Lynch said the opposite, unfortunately had to take a real big charge. But I think as we work our way through this earnings reports season, we will see at what point we are. And in the state of the financials.
VELSHI: We're crazy people. We celebrate when earnings are not as bad as expected. We're happy when oil is below $130 a barrel. Do we think that maybe there is some sense -- I think what people want to know is there some sense that we're bottoming out on the worst of things and maybe better times to come. LEEB: I think so, Ali. And another statistic that did not get very much attention were unemployment insurance claims. That tends to be one of the strongest-leading indicators. Came around $270,000, $360,000 which followed a week of 340,000. So if you average those two weeks, $350,000, I'm not trying to be complex, it suggests the economy is nowhere near a recession or the kind of recessions that we've seen in the past.
VELSHI: Well, to both of you, you've been honest but put a bit of a --an at least a positive lining a silver ling around it. We have lots to talk about, we always will. Art Hogan, good to see you again. Art is a chief market strategist at Jeffries & Companies, talking to us from Boston.
Stephen Leeb, who has been a good friend here and often we press you to give us the scary case scenario because we are worried about oil at these levels but as Stephen always reminds us he is a glass full kind of guy. Stephen Leeb is the president of Leeb Capital Management. We do have the news for you hat concerns your wallet.
Up next on YOUR MONEY, can the next commander in chief solves our biggest economic problems? Candidates Barack Obama and John McCain seem to think so. Their plan and how realistic they are coming up next.
(BEGIN VIDEO CLIP)
VELSHI: Senator Barack Obama and John McCain have a lot to say about issue number one this week, the economy. After all they had plenty of news to react to. Our senior political analyst Bill Schneider joins us now with more. Hi, Bill.
BILL SCHNEIDER, SENIOR POLITICAL ANALYST: Hi, Ali. The candidates are making a mighty effort just to keep up events just like you and me and everybody else.
(BEGIN VIDEO CLIP)
SCHNEIDER (voice over): The news on the economy is fast-moving and mostly down. Confidence in banks, down. The stock market, down. Housing prices, down. The chairman of General Motors is hoping things will settle down.
RICK WAGONER, CHMN. & CEO, GENERAL MOTORS: Frankly, we're going to have to ride it out for a while until market conditions settle down.
SCHNEIDER: Not everything is down, inflation up. Last month prices rose at the fastest pace in 27 years. Politicians are struggling to keep up with events.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: I think the system is basically sound. I truly do and I understand there's a lot of nervousness. The candidates talk about going after wrongdoers.
SEN. BARACK OBAMA, (D) PRESIDENTIAL CANDIDATE: Predatory, unscrupulous lending, check neither by the service corporate ethics or a vigilant government.
SEN. JOHN MCCAIN, (R) PRESIDENTIAL CANDIDATE: Speculators and lenders who contributed to this mess --
VELSHI: Barack Obama has a long-term energy plan.
OBAMA: I will invest $150 billion over the next ten years, $15 billion a year to put America on the path of true energy security.
SCHNEIDER: John McCain has a short-term plan, but payoff may take a while.
MCCAIN: We should be drilling right now in places that are off our shores.
SCHNEIDER: The economy seems to be spinning out of control. The candidates are hard-pressed just to keep up. Obama added an event to talk about how, if he's elected, the government will work with these auto industries to turn it into a new direction.
OBAMA: Rebuilding our manufacturing base and our auto industry and working with the auto companies to make sure that we're creating the fuel-efficient car.
(END VIDEO CLIP)
SCHNEIDER: Voters often behave as if the president is commander in chief of the economy but he's not. Nobody is. The economy's too big and too complex. And in turbulent times, that's a little scary. Ali?
VELSHI: Well, the discourse is such, we're talking about politics so much and this is issue number one. So what do they do? What should people running for office - what should the candidates be doing? Should Congress members be doing to try to address and a lay the fears of Americans? Because we know how serious these fears are?
SCHNEIDER: Well, the fears are serious. And they've first of all gain a sense of somebody knows what to do. Even if they are not fully in control they have to believe that their leaders have some ideas about what to do and they want to do them right away. I mean, Americans are saying, do something. They don't care if its left wing, right wing, cut taxes, raise tax, and just do something.
VELSHI: They want a plan.
SCHNEIDER: They want a plan.
VELSHI: To resolve this question. They want a plan and they want a plan they feel they have confidence in.
All right. Bill Schneider, senior political analyst and part of the best political team on television. Good to see you. Thank you for joining us, Bill.
SCHNEIDER: Sure. VELSHI: Coming up after the break, before you book your next trip, find out why the pilots of one airline think cutbacks may be compromising your safety.
And our CNN money team will be here. We're going to grade the Bush administration and the candidates on their reaction to those things Bill was just talking about. Inflation, high oil prices and the Fannie Mae and Freddie Mac mess.
VELSHI: Welcome back to YOUR MONEY. We're joined by our good friends from CNNMONEY.com. First though, Poppy Harlow has a look at some other stories that have been making news this week.
POPPY HARLOW, CNNMONEY.COM: Yeah, big week for business news. New home construction hitting a 17-year low in June. A further sign that the housing industry is getting worse a government report showing construction of single family homes fell more than 5 percent last month, hitting the slowest pace since 1991. Now the housing downturn has wide raising consequences from the U.S. economy as a whole. More than 500,000 construction jobs have been lost in less than two years.
And the housing industry is not alone when it comes to falling on hard times. The airlines have been hurting a lot. Surging fuel prices have been the biggest culprit there. Now pilots of US Airways are saying they feel pressured to cut back on fuel. Possibly compromising passenger safety. The company says it wants pilots to balance an appropriate amount of fuel with rising gas prices. Eight pilots and their union filed a complaint with the FAA, when they were called in for fuel conservation training for carrying 10 to 15 minutes of extra fuel above FAA regulation.
And finally a new survey finds 2 out of every 3 Americans are cutting their personal spending as a result of high gas prices. The Nielsen Survey shows how rising fuel prices are hitting the economy as a whole. Nearly 20 percent of more consumers cutting back due to the pain at the pump from a year ago.
VELSHI: That sort of makes sense. You know it has to come from somewhere. People often ask me, where are people cutting back? Because clearly this money is coming out of somewhere and Americans have not saved money for a few years. We've sort of had a negative savings rate for a long time. We've talked about this housing crises. It's really at the bottom of the mortgage issue that we've been facing and we started this week off with the failure of a bank which we hadn't seen for a long time.
VELSHI: Let me just introduce the rest of our team to you by the way, this is our CNNMONEY team. Paul La Monica from CNNMONEY.com. Jeanne Sahadi from CNNMONEY.com. They follow this all of the time, and even for you people who follow this all the time, this has been one challenging week. Let's start with this whole -- I mean we have a banking mess this week one way or another. JEANNE SAHADI, SENIOR WRITER, CNNMONEY.COM: This week in general.
SAHADI: This week the big news out of housing was that Treasury Secretary Paulson came out with a proposal to lawmakers that said, listen, Fannie and Freddie are having a tough time, Fannie and Freddie guarantees the purchase and trade of mortgages, even though there's an implicit government guarantee, we'd like to make it explicit. Please include in a law the ability of the government to have the option of buying stock in the companies and extending to them in an unlimited line of credit.
VELSHI: Propping them up and making sure that they understand that they are stable?
SAHADI: That's right. Secretary Paulson's point was, we may not use any of this money to do anything, what we want to do is instill as much market confidence as possible.
SAHADI: Lawmakers were not delighted to hear about an unlimited line of credit. Several said you know, sir, you're not going to be here next January. We are, and we have to answer to taxpayers so we're going to have to really think about this. So next week, the house is going to be voting both on the housing rescue bill which they've been debating for months and months and they're thinking of including these proposals but with very likely some limitations.
You've explained it well. I think the issue here of course, what I realized after trying to explain this, this week is that most everybody knows the Fannie and Freddie. And they kind of know what they do and they know they are involved in the mortgage business but it's not analysis to any are structure in the world.
It's hard to figure why it would be important, why it would matter if they were to fail. I don't know the grease in the wheels, I've tried that analogy. Or they are like your operating system on your computer. It has to kind of work. You are don't need to know all about it but if it doesn't work your computer doesn't work.
PAUL LA MONICA, EDITOR AT LARGE, CNNMONEY.COM: I think it remains to be seen. To use your computer analogy, there are some bugs in window, sorry Microsoft, right now. And Wall Street and the average consumer is trying to figure out whether or not tech support can actually fix this big problem we have. It was interesting, as the week progressed, I think there's been some growing confidence in the fact that Fannie and Freddie may be a little bit in better shape than we had all feared at the end of last week and earlier this week after Paulson initially proposed these new rescue plans for both government sponsored enterprises.
So we are starting to see a little bit of a bounce back and I think that's been helped by better than expected, but by no means good news, from a lot of nation's banks. JPMorgan Chase, Wells Fargo reported profit declines that weren't as big as expected. Citigroup reported a loss that wasn't as big as expected. So to put things into perspective, banks are still in a lot of trouble. But it just may not be the sense of Armageddon that a lot of people on Wall Street were predicting for many of these companies.
HARLOW: I think it important to to mention why people care about Fannie and Freddie. They underwrite about $5 trillion, about half of the mortgages in this country. Let's say they did collapse. Let's say they collapse, what happens is it maybe it even more hard than it is now to get a loan so that means the interest rate goes up. Some people are saying between about 1/4 and 1 percent. Something that can be manageable but if so something that is a very scary thought to a lot of people out there.
VELSHI: And, Jeanne, you mentioned earlier this week, that some had said they may be paying 3/4 of a percent more for a 30-year fixed loan because Fannie and Freddie may have been less stable than might be.
SAHADI: Yeah, there are actually two thoughts there. Because of the turmoil over Fannie and Freddie the cost of their doing business has gone up which means the cost of mortgage rates has gone up for consumers today. People who want to get a mortgage on that 30-year fixed rate may be paying a percentage point more than otherwise. Still not bad about 6.5 percent. But it might have been 5.5 percent in the normal market.
SAHADI: On the other hand, critics of Fannie and Freddie say that in fact the mortgage rates we've been getting, because of their existence, their job is to be a conduit and to make the market efficient and to keep rates low. They haven't been quite as low as the critics would like to see. So they question the bargain we're getting having a Fannie and Freddie at all. In the sense that you know the mortgage market has become very efficient and they think maybe their role has become a little agonistic. So.
SAHADI: So the real question certainly the rates have gone up a bit. Because people are so concerned about Fannie and Freddie and they are central to the market. They are the secondary market today.
VELSHI: My head was already spinning about this on Monday because IndyMac collapsed. Like I was hoping not talking about banking all week and clearly my wish wasn't granted. But sneaking in between with some news from General Motors and news from the airline. We had airline earnings; we had all sorts of things going on with airlines. Like the banking sector, Poppy, the airline sector is a little bit confusing at this point. We're not entirely sure what's going on.
HARLOW: It's when you look at their earnings report. Including this one-time gain. I mean break it all down they still lost millions of dollars. Continental really sort of leading pack losing about $3 million when you take out all of those charges but still losing money. It's because of the cost of fuel. If you look at some the facts, Delta spending $1 billion more this year on fuel, they say.
HARLOW: US Airways saying about $2 billion more. The Air Transport Association saying the cost of fuel increasing 50 percent. Over $60 billion, if you can fathom that, for the airline industry. They are managing to cut capacity, regional jets don't make much money at a when you have high fuel prices. They're increasing their international exposure, Delta is, that's going to help them in the long run, they think. And we saw a little bit of evidence of that this week so far, but still a dismal effect. The stock it's they rebounded a little this week but not strong overall, Ali.
VELSHI: Paul, we spoke to the president and CFO of Delta about a rating's call that came out earlier this week from Finch. A company that rates these companies. Finch said of the major airlines one won't be in business by the end of next year. There will be one possible bankruptcy. Delta was definitely one of those on the list.
LA MONICA: Right.
VELSHI: Is it likely that somebody's going to have to fold.
LA MONICA: It's very possible. Oil prices have been surging all year as we all know and that is of course meant rising fuel prices. Delta is hoping to be able to survive by merging with Northwest. We may see some more mergers as a way of airlines remaining viable but it wouldn't shock me if another major carrier files for bankruptcy. Whether or not that's the bankruptcies of old where you know a lot of the current carriers have already been in and out of bankruptcy several times, this time though we may actually see a carrier go out of business along the lines of, remember Eastern, Pan-am, some airlines.
VELSHI: Well, for the record the president of Delta says he doesn't expect it to them but that's what I don't think anybody will be offering themselves up for that right now. They're trying very hard to stay in business and it's tough to where the oil price where they are. Thanks to all of you. Thanks so much Jeanne Sahadi, Paul La Monica, Poppy Harlow.
Coming up, what goes up must come down. What's in they say, anyway. Could this finally be happening to the price of oil?
And later, trading in your gas-guzzling SUV for a tiny fuel-efficient car. We'll tell you why more often than not it may not make sense for you.
WHITFIELD: Hello, I'm Fredricka Whitfield in Atlanta.
Barack Obama has arrived in Afghanistan. Obama's first meetings involve local Afghan leaders and U.S. troops in the country's volatile east. He is to meet tomorrow with Afghan President Hamid Karzai.
The U.S. state department's William Burns arrives for nuclear talks with Iran. Today's meeting in Geneva between the European Union and Iran's top nuclear official didn't persuade Tehran to cease enriching uranium. It was notable, nonetheless, for the first time the presence of a U.S. diplomat, Burns was only there as an observer. Did not speak.
The chief of U.S. Homeland Security says United States intelligence was in on the seizure of drug-latent sub or of a drug-laden sub off of Mexico. The sub was seized Wednesday by the Mexican navy with nearly six tons of cocaine. Michael Chernoff says the U.S. spotted the sub and guided the Mexicans to it.
Coming up at the top of the hour, "Special Investigations Unit: We were warned out of gas." And now back to YOUR MONEY.
VELSHI: Well, crude oil prices retreated from their record highs this week. Prices started to fall following more bad news in the banking and mortgage sectors and an expected decrease in U.S. demand, should the economy slow more? Well, could lower energy costs be the silver lining in this otherwise stormy economy? To discuss this, we've brought back our good friend Stephen Leeb, president of Leeb Capital Management; and Peter Beutel, president of Cameron Hanover. These two gentlemen have, for years, been telling us what they think about where oil is going and what's going on.
Peter, I was just telling Stephen in the last segment, we're a strange people who celebrate the fact that oil dropped below $130 this week after being almost $150 last week. What's going on?
PETER BEUTEL, PRESIDENT, CAMERON HANOVER: Well, the market is starting to look ahead at lowered demand. It's very worried about a lot of the recessionary implications that we saw this past week. And demand is dropping. And it looks like it's not just going to drop in the United States. It looks like given the right opportunity; it will fall around the world.
VELSHI: Now Stephen always brings up the point that you're alarmed that just as we might be turning a corn or conservation -- and, Peter, by the way, has been one of those people who has been preaching conservation over other things for a very long time, you're concerned that, wow, if it starts going this way, we are all going to breathe this sigh of relief and relax and stop worrying about oil.
STEPHEN LEEB, PRESIDENT, LEEB CAPITAL MANAGEMENT: Yes, Ali, I mean, basically we can conserve in this country. There's no doubt. But there's a big doubt as to whether that matters at all. Because to the extent that we conserve in this country, it means oil would be otherwise cheaper than it would have been if there were no conservation. And that's going to mean the Chinese and the Indians can even use more oil.
VELSHI: Because it's cheaper?
LEEB: Right. Because it's going to be otherwise cheaper because we're conserving. I mean, this is catch-22. It really doesn't make a whole lot sense.
VELSHI: Well, Peter makes the point -- Peter, you often make the point that the conservation that Americans can take part in has to do with the fact that if you use less fossil fuel, your bills will be lower.
BEUTEL: Yes, very much so. And on top of that, the price will drop. But I would also say that Americans have been so strapped by high food, fuel and everything else prices lately that I think we're going to be buying less Chinese imports and China has had a kind of mercantilist system with us, where they take the money they get from the imports, use it to subsidize energy, keep their energy input costs very low, turn around and export to us these products that have been made with low energy costs, undersell our products and we buy more and more.
If we don't have the money to buy their products, we could actually short circuit this entire mercantilist system that China has with us and they may then have to get rid of their subsidies and pay a fair price for oil. And that could actually kill demand over there. That's what I'm hoping happens.
LEEB: I don't think a chance in the world that's going to happen, Ali, unfortunately -- or fortunately. First of all, the Chinese are totally aware of what Peter is saying. They are not going to drop subsidies. Their labor costs are not going to rise above us and that's the reason that we import so much from them.
I think the U.S. economy is far from a recession. But even more than that, retailed sales in China right now are growing 20 percent year over year. And there is room for that kind of internal growth to continue almost indefinitely.
Passengers, number of vehicles, per 1,000 people this China, 25,000. In Brazil, which is another developing country, the number is 140 or so per 1,000.
VELSHI: And what is it here?
LEEB: Eight hundred. They'd have to move up 32-fold to get to where we are here. It's ridiculous, these numbers. Now on top of this, once capitalism is out the bag and this is a sociological phenomenon, I didn't make this up, I didn't say this, but every economist says it, every psychology says it, once capitalism is out of bag, as it is in China, you define yourself in terms of what you can afford.
And that means the Chinese people who, right now, have just started to get a taste of capitalism, they're going to want more cars. And cars in China are about $3,000, $4,000.
VELSHI: So, Peter, we are, in the United States, less than 5 percent of the world's population. And I think you both gentlemen know these numbers better than I do. We consume about 20 percent of the world's oil production every day. The math on this, if you've got India, you've got China, India is going to have the Tata, $2,000 car that people are going to start driving. China's growth, Russia's growth -- growth in the Middle East. We can't -- we just simply can't sustain the equation.
BEUTEL: I still feel that the American consumer is the linchpin of the whole world. Yes, I see what we're talking about here. That these new cars are going to come along and everybody is going to want one. But, I mean, these guys are not making very much money right now.
I mean, some Chinese are making $2 or $3 a day. I think ultimately we are going to have a recession. We are going to see demand drop and we are going to see oil prices pull back world wide.
VELSHI: Well, I wouldn't want -- I mean, we all want oil prices to drop but I don't think anybody wants to get at it by getting to a recession first. But what's your prediction for where we go with oil in the next year?
BEUTEL: I think there's very good chance we can see it back under $100 at some point. But you know, I mean, there are so many wild cards in this. If we were to have a hurricane like Rita or Katrina, then, boom, we're right back at the highs. If we were to have a problem with Iran and the Straits of Hormuz are closed, bang, we're right back at the highs.
But barring those, I'd like to say I think we could see oil back under $100.
VELSHI: Do you think so?
LEEB: Ali, anything could happen. I mean, you know, we could make peace with Iran. You could get a temporary setback. But let me just give you one more data point. The head of exploration at ConocoPhillips, which is one the most successful and largest integrated oil companies, was quoted a month ago as saying, if oil -- our costs of increasing production right now, if we want to increase production, we need oil at at least $100 a barrel...
LEEB: ... and rising. So if you get it under $100, heaven help us, we are not going to have any oil projects, never mind alternative energies. It won't...
VELSHI: Because it's costing money to make this.
LEEB: Right, it will not stay there.
VELSHI: Wow. All right. The two of you, thank you very much for being with us. Peter Beutel is the president of Cameron Hanover. And Stephen Leeb is the president of Leeb Capital Management.
Still to come on YOUR $$$$$, trouble in the skies and on the runway for that matter. Find out if your favorite airline is getting better or whether they're at risk of going out of business coming up next.
VELSHI: All right. We just finished a hardy conversation on the airlines, which would make it the 730th time we've done that this year, because not much time goes by when the airline is not in the news -- or some airline is not in the news, you know what's going on, your fares are going up because of fuel price, and your airline experience is going down. Henry Harteveldt joins us now. He's the vice president and principal analyst at Forrester Research. He studies the airline and travel industry closely. And rather than complaining about fuel increases, Henry has got an interesting thesis.
Henry, you're suggesting that the problem here is that the airlines don't charge us enough money already. What do you mean?
HENRY HARTEVELDT, ANALYST, FORRESTER RESEARCH: That's correct. Ali, our research shows that it costs an airline about $45 an hour per seat just in fuel to fly a plane like a 757. So when you're buying a ticket at $37 one way or whatever doesn't reflect that cost alone, the airline is losing money.
Airlines have been traditionally hesitant to charge the true, full cost of their product and they need to get over that. We heard Gerard Arpey earlier this week say American loses business if they don't charge the same price as a discounter. What he's basically saying is American have failed to make its value proposition clear to people about why they cost more and are worth that premium.
VELSHI: OK, so one of two things is going to happen, airlines are going to raise -- according to your thesis, one of the two things could happen, they can raise their prices so that they actually are profitable all of the time, or a bunch of airlines are going to have to go out of business.
HARTEVELDT: Actually, I think it's both. Ali, I think airlines absolutely have to raise their fares to cover their costs of doing business. They have a responsibility as businesses to return money to their stakeholders and to earn a profit for their employees and everybody else. And we are going to lose airlines. There's just no question, we have too much capacity in the market and it's a sad thing to say but there are some airlines that are going to go out of business...
VELSHI: OK. But we're talking about a cultural shift then, just kind of like the whole car situation, right? We're culturally attuned to cheap gas, living far from where we work, driving big cars, and in order to shift because of high gas prices, it will take a while. That's going to be hard, we're going to have to move -- change the way we live.
Same thing with travel. Travel has been cheap and accessible for Americans. You're talking about a future where air travel is not necessarily all that cheap or accessible?
HARTEVELDT: Well, it'll be more expensive than it is. But there will still be competition and it will still remain affordable. It just won't be as cheap as it is now. And you're absolutely right, Ali. There are some people who are going to be priced out of the market. And that's -- that's an unfortunate reality of a high-fuel environment.
VELSHI: It's becoming...
VELSHI: Sorry, go ahead, Henry.
HARTEVELDT: No -- what I was going to say is that the airline business is brutally competitive. And the good thing for us as consumers is airlines, like Southwest, JetBlue and Airtran continue to bring value in terms of affordable prices. They tend to set the pricing standards. So other airlines have to choose how to match and respond to these guys.
VELSHI: Tell me why U.S. carriers, when we talked to them, always say they're doing better on overseas' routes. I would assume you burn more fuel doing that. Why is it like airlines like Emirates can make it work and make money? Why is it some airlines work and some don't? Why is it some routes are more profitable than others?
HARTEVELDT: Well, on the long haul routes, you don't have competition from airlines like Southwest, which has been smart enough to be able to hedge a lot its fuel and to be able to afford to charge lower prices. So you don't have that intense low price competition.
You also have more business people traveling where their companies are willing to pay for a business class or a first class ticket. So you have a higher mix of high yield traffic. Domestically, it's pretty much, for the most part, all coach and focused on discount flying.
And frankly, when we fly internationally, we tend to focus more on the experience and we're willing to pay a little bit more.
VELSHI: Right. You're going to be on that flight a bit longer. Talking about the experience, you are not in that camp, then, that thinks that the perks are coming through anytime soon or that these fuel surcharges -- surcharge implies it might disappear at some point, are likely going to disappear. You think this is the direction we're generally going in.
HARTEVELDT: Right. Ali, I mean, as someone who flies 250,000 miles a year, I would love to see the perks come back. I don't think they will. The era of, you know, Pucci- and Haltson-clad flight attendants is over. Free meals in coach, over in -- at least domestically. You know, we've just -- we're not willing to pay that.
Our research shows, Ali, that 35 percent of people will put their budget ahead of where they want to travel, where they go on a vacation. The other thing, Ali, is we value price. We, as consumers, vote with our pocketbook and you know if one airline is less than the other and we don't see a difference, we'll switch.
VELSHI: Yes. It's commoditized. Henry, always good to talk to you. Thanks for you honesty. It's not the best message but you know what you're talking about. Henry Harteveldt is the vice president and principal analyst at Forrester Research, joining us to talk about those airlines.
Coming up next, shifting gears, let's think about trading in that gas- guzzler for a more fuel-efficient vehicle. But hold on, there might be a reason that that decision might not pay off. Stay with us, and we'll talk you through that when we come back.
(BEGIN VIDEO CLIP)
RICK WAGONER, CHMN. & CEO, GENERAL MOTORS: Our goal is not just to change GM's bottom line from red to black, which we're all working hard to do as soon as possible, our goal is to change the company for the long haul, to structure GM for sustained profitability and growth, to set us up to be competitive for years to come.
(END VIDEO CLIP)
VELSHI: Big moves for a badder General Motors this week. The automaker announced a plan to save billions of dollars by making more cuts. GM will suspend its dividend, sell-off $4 billion to $7 billion in assets, and cut payroll for salaried workers by 20 percent. Chairman Rick Wagoner said the cuts were necessary to succeed in a weak economy, which is plagued with high oil costs and estimates the move will save GM $15 billion through 2009.
Now high gas prices have some car owners thinking that it might be a time to downsize their vehicle, but our next guest says trading in your gas guzzling SUV for a compact fuel-efficient car probably won't save you money. Peter Valdez-Dapena from cnnmoney.com joins us now to explain.
Peter, we've been wanting to have this conversation for a while because it seems obvious to people who have SUVs and trucks -- I have an SUV, it gets 17 miles to the gallon, I talk about it all of the time, I would not be able to recover anywhere close to what I think it should be worth in this environment. Nobody wants to buy it. So if I wanted to trade down to a fuel-efficient car, I will take a financial bath on my vehicle, and then I will probably pay a premium for what it is that I want to buy because the things that I would want to buy are all in demand now.
PETER VALDEZ-DAPENA, CNNMONEY.COM: Right, it's crazy. Because you don't want it, guess what, neither does anybody else right now. And I was talking to somebody at Kelley Blue Book about this who says, you know, really, it's not even rational at this point. So one reason to wait might be SUV prices for your vehicle might actually start to creep up a little bit later on once people calm down a little bit and realize...
VELSHI: Once everybody stops trying to unload their SUVs.
VALDEZ-DAPENA: Right, right. And people calm down and realize, you know what, even though the fuel economy is not that great, that thing is so cheap, it is still worth at getting it at that price. So it might actually creep up.
But also, you know, if you're talking in trading in your vehicle on something new, especially if you haven't had your SUV that long, it's never a good idea under any circumstances to get out a vehicle too early.
VELSHI: Because of the way a vehicle's cost structure is built or the way it depreciates, it's always sort of the -- it's going to take you a while to get to the point where you think the value of your car is what it.
VALDEZ-DAPENA: Right, right. The cheapest vehicle you can have is the one that's already in your driveway.
VALDEZ-DAPENA: You're already paying on that, you've already made payments on it, and you've taken the depreciation. You're just going to start all over again.
VELSHI: Well, let's take a couple of examples. I mean, you've got the example of a Chevy Tahoe, a 2005 Chevy Tahoe, which is a nice, big vehicle. But you think it uses too much gas. So you want to trade down to something else. And you've taken the example of a 2008 Toyota Rav 4, very fuel-efficient, little SUV.
VALDEZ-DAPENA: Right. Now to be honest, it was Consumer Reports that did the analysis on these and ran these numbers for us. And you know, according to their figures, and you have got to believe them -- and first of all, let's point out here that this is a bit of a stretch. There are not too many people that bought the something the size of a Tahoe are going to just easily switch to a Toyota Rav 4.
VELSHI: Much smaller vehicle.
VALDEZ-DAPENA: Much smaller vehicle. But even if you were to do that, even though the Tahoe is going to cost you more in fuel, the overall costs, including financing, insurance, the depreciation on that new Rav 4, plus the fact that your Tahoe is going to get you a lot less at trade-in, making that Rav 4 cost more again, all of that added together ends up that the Rav 4 actually costs you more in overall cost.
VELSHI: Now we are making these assumptions at gas at $5 gallon, which we're not there. But that's even -- that makes the case even more strongly.
VALDEZ-DAPENA: Even stronger, right. This is even if gas prices do continue to go up.
VELSHI: Now let's look at something like taking that Chevy Tahoe and trading it in for a Toyota Prius. That's all the rage these days. First of all, it's going to take you, what, nine to 12 months to get yourself a Prius if you want one, a new one?
VALDEZ-DAPENA: Yes. It's -- first of all, well, yes, you're going get on a waiting list if you're buying a new Prius. It's going to take you a while to get one. But also, that's a really extreme example. Somebody buying a Tahoe can...
VELSHI: ... can fit a couple of those in a Tahoe.
VALDEZ-DAPENA: Try towing your boat with a Prius, not going to work. But if you did do that, OK, yes. If we're going to take that kind of extreme example, which is about as extreme as you can get, there it kind of makes sense. But if you can't go that far, really, you're better holding onto your SUV, and maybe, if you really feel like you need to, buy a used fuel-efficient car.
VELSHI: There are lots of resources for people to figure out about -- things about this (INAUDIBLE) so before you make the decision to unload whatever you've got, Peter, can people can check it out, they can go on-site. And by the way, check out Peter's stuff -- Peter Valdez-Dapena on cnnmoney.com. He covers the auto beat for us, and I know he's going to have a lot of interesting stuff coming out just in the next week.
Peter, good to see you, thank you so much.
VALDEZ-DAPENA: Thank you very much.
VELSHI: Well, if you want to save money on gas, you might want to consider getting a two-wheeler. CNN's Carrie Lee will explain next. But first, this week's "Right on Your Money."
VELSHI (voice-over): Money be might be tight these days but now might be the time to invest, even if it's only a small amount.
HILARY KRAMER, AOL MONEY COACH: We're so low. It's always where you start investing. This is a perfect time to put your money in the market, absolutely perfect.
VELSHI: The key could be thinking long-term.
KRAMER: It's the power of long-term investing. What you have to realize is if you invest $500, $500 in an S&P 500 index, and it does 10 percent over the next 20 years, you're going to more than double your money. So as long as you have a very, very long time horizon, decades rather than months or even years, there's a lot of money to be made.
VELSHI: But there are ways to invest and cash out sooner rather than later.
KRAMER: Well, it depends when you need access to the money. If it's in the next one to two years, do a certificate of deposit.
VELSHI: CDs are offered for fixed terms from a few months up to five years, but remember, withdrawals before maturity will usually be hit with a substantial penalty. And that's this week's "Right on Your Money."
VELSHI: You're not going to see me for a couple of weeks, because I'm going to go to Europe. And if you travel in Europe lately, you've probably noticed that scooters are a popular form of transportation. Here in the United States, they're not as common. It seems to be growing, but that's changing because gas prices are soaring and commuters are looking for more fuel-efficient ways to get around. Scooter sales in the United States rose 24 percent in the first quarter of 2008, compared to a year ago. Small motorcycle sales are up more than 7 percent, that's according to the Motorcycle Industry Council.
Now on the road, scooters can get 60 to 100 miles per gallon depending the model. Motorcycles get 50 to 70. CNN's own Carrie Lee knows all about this, she has been riding this Vespa scooter that you saw a moment ago to work for years.
This is yours, this isn't a prop.
CARRIE LEE, CNN CORRESPONDENT: This is not a prop. I did ride it to work today, legitimately. And I'll tell you what I did. Let's talk about some things that you need. If you're thinking about getting a scooter, for most models you do need a motorcycle license, so that's a good thing. Always a good idea to take a safety course. You always want to keep your eyes protected. The last thing you want is debris flying in. So here are my Snoopy 1940-esque goggles.
VELSHI: They look good, they look stylish.
LEE: Yes. They leave a nice mark around your eyes...
VELSHI: But it is important because I -- and I ride a motorcycle, it's the same thing, you just do not -- even a little grain of sand in your eyes is going to throw you off and you need all the attention and skill on that.
LEE: Absolutely. Absolutely. And helmet is mandatory. I don't care if you're living in a state that has helmet laws or not, don't mess around with that. And also, not in the heat of summer like this, but always -- unless it's really hot, I wear gloves, because never know, something -- you know, you might have to fall over or put your hand on the ground...
LEE: Yes, so it's a good idea to wear gloves as well.
VELSHI: The safety courses are important, because while everybody can learn to ride that in about five minutes, what you're learning about is what to do when you're in a little thing like -- I mean, you ride this around Manhattan. Is that scary?
LEE: It isn't. It isn't. The first couple of times I did it, I thought, OK, I acted a bit conservatively. Now I'm totally confident, weaving in and out of traffic. And that's really the beauty of this. You know what Manhattan traffic is like. You get stuck. Well, on a Vespa, you can just weave right into the front.
VELSHI: Park very easily, and boy, you get a lot of gas for that. That is excellent, you're going to look cool riding around. We'll wave at you if we see you. There she is. CNN's Carrie Lee. Good to see you, Carrie.
VELSHI: Enjoy. I'll see you on the road.
Let's see what you had to say, by the way, about oil and alternative energy. We had done a series on the oil sands near Fort McMurray, Canada. T.C. writes: "How do I apply for a job in Fort McMurray, Canada, working in the oil sands?" Boy those jobs pay very, very well. There are many, many employers up, Shell, Syncrude, Suncor, those are all companies. You might want to search on the Web. For some of those jobs, you might need to get a visa to work in Canada. But check it out, the money is very good.
Norah had this to say. "I'm an investor and a supporter of alternative energy, particularly wind and water. What perturbs me most about the government is that they do not make alternative energy cheap for our homes. Why isn't solar power much more affordable? Everybody should be going solar."
I really agree with you. And one of the things is that as traditional energy becomes more expensive, the market is making it more affordable for these different types of energy and I hope it continues to do so.
And lastly Ramon writes: "You guys make understanding the economy easier for someone who isn't an economist. Thank you for that. I'm writing this because I don't hear anything about the possible short- term solutions to start alleviating the energy crisis while other options are developed. You guys always say that any move by the government for alternative energy is a long shot, but we have to start with something."
And you're right about that, there are some short-term solutions, you've heard John McCain talk about alleviating the gas tax, and Barack Obama talking about taxing oil companies for excessive profits. There are also discussions on Capitol Hill about ending the excessive speculation that some people think is driving up the price of oil. Don't know whether those will work or whether they make sense, but people are talking about short-term solutions as well as long-term solutions.
Thank you for your e-mails and thanks for joining us for this edition of YOUR $$$$$. We'll see you back here next week, Saturday at 1:00, Sunday at 3:00. See you then.