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The Road and the Roadblocks; Step Aside, Washington; Man vs. Machine; When to Hold Them, When to Fold Them; Are the Central Banks Too Powerful?; Too Big to Fail, Now Bigger; Rubber Meets the Road
Aired March 31, 2013 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
ALI VELSHI, CNN ANCHOR: I'm Ali Velshi and this is YOUR MONEY.
Well, the Dow has just wrapped up its best first quarter since 1998, up 11 percent. Now that is better than you'd do in an entire year some years. Those of you who stayed invested since the market bottomed in March of 2009 like I kept telling you to do have taken advantage of 130 point -- percent rise in the S&P 500. That's the benchmark index for many of your retirement investments including your 401(k) and your IRA.
Then there's housing. That other leg on the stool. Finally, housing bottomed out last year with home prices steadily going up largely due to historically low mortgage rates. And with home values climbing again, Americans have gotten back their number one tool to help build wealth and put it to work for them.
And finally there's this boom in America's energy sector which has already started to reduce America's dependence on foreign oil and has crushed natural gas prices by some 75 percent in just five years. Industry is taking advantage of the savings to bring back manufacturing jobs to this country. And I continue to maintain that this energy boom could fuel an economic renaissance in America for years to come.
But many of you are not buying it. Not yet anyway. More than half of you still are afraid to get into the stock market in spite of the gains of the last four years. Some of you, by the way, because of it. Consumers are still wary of this economy and they may have a point. Despite 36 straight months of private sector jobs growth, the overall economy only grew by a paltry .4 percent in the last quarter of 2012. The last three months of 2012.
Why? Well, one reason could be our broken government in Washington, which still can't pass a long-term budget and prefers to govern from one fiscal crisis to another. Crises of its own making, by the way.
Well, joining me to discuss this all of this and more is Mohamed El-Erian. He is the CEO at PIMCO, one of the world's largest investors in bonds. Chrystia Freeland is the author of -- is the editor at Thomson Reuters Digital. And of course Christine Romans, the host of "YOUR BOTTOM LINE."
Welcome. Good to have you all here. Mohamed, we never get to speak to you in person so it's great to have you here. You warned that those forced government spending cuts, which we called the sequester, were going to do great damage to the economy. Strangely, the stock market doesn't seem to buy into any of this. Does that mean that the -- the sequester wasn't the big deal we thought it was going to be or does it mean there's still more to come that the market is ignoring?
MOHAMED EL-ERIAN, CEO, PIMCO: Unfortunately, Ali, there's more to come. And the issues are really important. The economy is stuck here. The stock market is there. And that's why we have a mix of excitement but also anxiety. So how do you reconcile? It's the wedge. It's the wedge of monetary policy. It's the wedge of a very aggressive Fed. And what's critical in the next few months is for the assisted growth to come up to a genuine growth to validate the stock market. And that's why it's really important to remove these headwinds from Washington.
VELSHI: That's interesting because that could happen, or it could go the other way. The stock market could figure out, wait a second. There's -- there's some air underneath us. Earnings are not -- you know, prices are not high compared to where they were the last time the markets hit these records. There's -- clearly there's Fed stimulus involved in pushing people into the stock market. But do you think it's real? Do you think these prices are real?
El-ERIAN: I think all prices are artificial. So if three months ago I would have told you that we would have an 11 percent increase in the Dow Jones and the 10-year would be stuck at 185 and gold would be at 1600, you would have -- that's inconsistent.
El-ERIAN: But that's what has happened? Why? Because there's an artificial play in markets. It's the Fed. And you know what, they have a printing press in the basement.
VELSHI: Right. Right. All right. Chrystia, there is -- there is that disconnect that Mohamed talks about and then there's this weird disconnect about how people feel. Christine pointed out earlier to me that there are 12 or 15 or 20 million people in America who don't buy this argument that things are going well because they're still out of a job. There are a lot of people, more than half of Americans, are not in the stock market.
Talk to me about this economic disconnect.
CHRYSTIA FREELAND, EDITOR, THOMSON REUTERS DIGITAL: Well, I noticed, Ali, when you had those three legs. Right?
FREELAND: You had the stock market, you had housing and you had energy.
VELSHI: Right. FREELAND: And those are all very important legs and I buy that argument. You didn't have jobs.
FREELAND: And I think one of the --
VELSHI: And that's the most important leg really.
FREELAND: That's the most important for everybody.
FREELAND: Not so much for Mohamed, right, he's in the -- he's in the investor group but most of us --
VELSHI: But ultimately he does an income. Everybody needs an income.
FREELAND: Right. But he makes it from investing.
FREELAND: Most of us are making it from our paychecks that we get every month.
VELSHI: Right. Right.
FREELAND: And part -- another -- I agree with Mohamed talking about the Fed, but there's another disconnect going on as well, which is that a lot of the forces that are driving the rise in the stock market are not actually affecting people's jobs. And part of what's happening is, and this is another one of these disconnects that is new in the economy, is increases in productivity are not feeding into increases in wages.
FREELAND: We have seen that since the late 1990s. And that is --
VELSHI: Sometimes it's actually the opposite, Christine. We have increases in productivity, which means you can do more per labor hour.
CHRISTINE ROMANS, HOST, CNN'S YOUR BOTTOM LINE: Right.
VELSHI: Per person. And somebody -- you take the profit off of that, but the worker doesn't get the benefit.
FREELAND: Maybe even you fire people as a result.
VELSHI: Right. And we do. ROMANS: And we're watching where it used to be you see 1 percentage point of economic growth or you see 2 percent of GDP reading and you say, that's going to mean X number of jobs. It doesn't mean that anymore.
ROMANS: And people are trying to go back and figure out at what point do you start getting -- can you have 2.5 or 3 percent economic growth and not meaningfully begin to lower the -- the unemployment rate. I mean there are some -- I wanted to be very clear here. The U.S. is moving in the right direction. You have Europe in a recession, a very big property market concerns in China.
The U.S. is moving --
ROMANS: This week a lot of economists in the U.S. actually raised their forecasts for first quarter GDP. We talked a lot about what happened in the fourth quarter. But the first quarter is looking like it's going to be stronger so despite all of these things we're talking about.
ROMANS: And with the help of the Fed, the economy is doing better.
VELSHI: So the problem is, to some of our viewers, Mohamed, is that the decision about whether to be in this market in some fashion or not, that means bonds or stocks, is binary. It's either the economy is doing really well and I want in, or this is all above all and it's weird and it's inconsistent.
The fact is, for all the inconsistencies, if you were invested in the stock market over the last four years, you would have made a great deal of money. Now what do you do?
El-ERIAN: So absolutely right because the Fed has been your best friend.
El-ERIAN: Right? But --
ROMANS: Don't fight the Fed. There's a --
El-ERIAN: Don't fight the Fed. And if you can get on that train, get on that train. But we've just talked about two things. One is we're not using inclusive growth. And secondly, there's an income distribution issue which is, if you have a globalized set of skills, you're doing great in this economy. But if you happen not to have that, you really are struggling. So --
VELSHI: So who's supposed to fix that? How does one fix that? El-ERIAN: So that's where Washington comes in. Right? I think of it as the global financial crisis sent us into the ICU. We recovered, we're out of the hospital. And we are better than others, but we are still structurally impaired. So everybody is expecting us to run, but we're just walking. And in order to get running --
El-ERIAN: -- we need to improve the structure of the economy. That speaks about the --
FREELAND: Yes. And that's a long-term -- that's a long-term project and it's non-obvious. Right? Like the thing about being in ICU is that some pretty obvious things that need to be done --
FREELAND: -- to get passed the financial crisis.
VELSHI: Stimulus and bailouts, and things like that.
VELSHI: That are of the moment.
FREELAND: And I think what Mohamed is talking about is sort of the big project of the 21st century and no one really knows for sure how to do it.
ROMANS: Here we are, though, in a period where there are people who are running and making a whole lot of money in housing, in the stock market.
ROMANS: They are the people -- they are the people who predictably would -- people who already have capital, people who already have money to deploy, and the vast majority of us are not able to go ahead and grab -- to ride the Fed.
FREELAND: And people who see global skills that Mohamed was talking about. Right?
El-ERIAN: Because that speaks to the fundamental issue any investor should be asking today. It's not what can go well, but if I make a mistake, what mistake can I afford to make? And the reason why the average American is not getting involved --
VELSHI: Can't afford.
El-ERIAN: -- is because they can't afford a big mistake.
VELSHI: That's right.
El-ERIAN: Whereas rich people can afford a mistake. So they get the upside and they also have self-insurance against the downside.
VELSHI: And that is what so many of our viewers have told us. I'd have loved to have gotten into the market back then. I'd even love to get into it now if what you're saying is true. But I can't afford to lose what I -- what I can't afford to lose.
Stay with us here. Coming up, if this economy is a runner on the road to economic renaissance, it could use some cheering on from Washington. That's not happening. But have our leaders at least stopped sticking out their feet to trip up the runner? That's next on YOUR MONEY.
VELSHI: We still don't have a budget. We haven't had one in this country in four years, but at least we don't have to worry about a government shutdown for now. This week President Obama signed a continuing resolution to fund the government through the end of September. He'll present a budget proposal on April 10th, that's about a month and a half late. He says the end of the year fiscal cliff debacle delayed everything.
Now those forced budget cuts have been in effect for a month now and the sky hasn't fallen, although it's probably too early to say whether it will or not because few of the cuts have happened yet. Government agencies are finding ways to deal with the bad policy that's been thrust on them. Even the Pentagon now says it only has to furlough workers for 14 days instead of 22 days.
And we've got a bit of a breather before the next mini crisis hits. A fight over the debt ceiling is brewing again. But that showdown isn't likely to hit fever pitch until midsummer. There are even signs of reaching across the aisle.
President Obama made a rare visit to the capital this month to meet with lawmakers of both major parties. Both parties. No major breakthroughs though, at least they're talking. He's also called on Senator Johnny Isakson, a frequent guest on this program, to organize a dinner with a group of rank-and-file Senate Republicans. This would be the second sit-down with GOP senators in a matter of weeks.
So for just a moment here, for just a moment, it appears Washington may have stepped aside just enough to get out of the way of economic recovery. But is it going to last?
Stephen Moore is an editorial writer for "The Wall Street Journal." John Avlon is a senior columnist at "Newsweek" and "The Daily Beast." These are both great friends of our show.
Stephen, let me start with you. Am I imagining it or is Washington actually ceased to be the impediment that it has spent the last two years being to the American recovery? STEPHEN MOORE, EDITORIAL WRITER, WALL STREET JOURNAL: You know, I think you're on to something here, Ali. I talk to businessmen and women all the time. And recently they're saying, you know, we don't always like the policies out of Washington, but right now there's a kind of benign neglect going on. At least we don't feel like a lot of bad things are coming down the pike.
And so yes, I think a lot of businesses are moving forward. You're starting to see an expansion of hiring. You saw what happened with the stock market over the last three months. And I think a lot of these businessmen and women and workers are stay, you know, maybe there's a calm, and whether this is a calm before the storm, I don't know.
VELSHI: Right. John, there's a -- Stephen called it benign neglect possibly, and there's a difference between benign neglect if you're -- and doing something helpful. But, you know, this government has lowered expectations about what it should be doing to help the economy. Should it be doing anything at all or is this now the new normal and it's OK?
JOHN AVLON, CNN CONTRIBUTOR: Absolutely it should. Benign neglect isn't enough. Look, I do think the economy is improving despite of Washington, D.C.'s chronic dysfunction and division. But there are some signs of silver lining.
Look, for example, immigration reform, something that businesses know really needs to happen. And it's -- skill business, for example, h1b visas. So there seems to be a political moment where both parties see their self-interest in passing something for the national interest. That's positive. For the economy and for the country.
But we're going to have to see real movement on the grand bargain. It seems unattainable, but it's not. To get the country on a really stable fiscal (INAUDIBLE). We're going to need to see infrastructure investment. There is a role for government in this. Government has hurt this recovery enormously with their brinksmanship.
But now is the time, with some sign that they can work together, they -- read the tea leaves this election right, maybe we'll start to get some progress out of Washington.
MOORE: But you know, John. John, I agree with what -- most of what you just said.
AVLON: You should.
MOORE: And Ali --
(CROSSTALK) The one kind of interesting thing, though, is if you look at these two budgets, you know, you mentioned that for the first time in what was four years the Senate, the wee hours last weekend, passed a budget. But that is a polar opposite of the -- of the budget that the House Republicans passed.
MOORE: So this big, you know, Grand Canyon divide --
MOORE: -- between the two parties on these fiscal issues, which is, let's face it, that's still the number one issue. That's still pretty wide.
VELSHI: It's very frustrating to see these budgets actually get passed. I mean, it's more frustrating to see no budgets, but in some ways, you know, we've skipped the real way that budgeting is supposed to be done in this country, John, where the president puts forth his budget proposal, which he'll now put forward on April 10th, and then everybody really has to get down and negotiate.
We skip right to the voting for it and whoever party runs the place gets the budget they put down. It's not -- it's not the kind of way a budget is going to happen. Now when they come back from vacation --
VELSHI: -- the House and the Senate, the bickering is going to start all over again. The House and the Senate, as Stephen said, they both passed budgets but neither of these will actually be the budget that we'll end up having, if we ever have one.
Are we ever going to have another budget? I mean, you said, John -- you said there's a hope of a grand bargain. Where do you see that hope?
AVLON: Well, I -- because frankly I think with the debt ceiling now pushed to summer, there is a realization that maybe the parties aren't far apart. And the president might be willing to give a little bit on tax reform. But anyone -- in this atmosphere, who's clinging to this illusion that they can have an ideologically first solution, they're living in reality, the reality of divided government.
AVLON: It is ridiculous that we haven't had a budget in four years.
AVLON: But I think the fact that the House passed a budget, the Senate passed a budget. One, it reflects pressure from no budget, no pay. There are feelings of self-interest in trying to pass something. And two, it's a recognition, even by Boehner, in particular, I think, that this ultimately is going to get resolved in conference because the two parties are too polarized to really get something done. So we'll start with positional bargaining and get it resolved in Congress. VELSHI: Stephen, you know, we get Johnny Isakson on the show a lot. He's -- President Obama has asked him to put this dinner together. I like Isakson. He's -- he's an ex-businessman. He knows about a lot of stuff. And he definitely is one of a -- a handful of Republican senators who have been able to reach across the aisle. They liked Simpson-Bowles, they were able to do stuff.
Do you think those guys are going to prevail over hard liners?
MOORE: It's a tough call, it really is, because you know, the parties are so far apart. John is right. It's interesting that the news that leaked out over the last couple of days that the president is going to maybe put some entitlement reforms on the table.
Now, Ali, that's a big step forward if that's true. And because that's one of the things the Republicans have been holding out for.
I want to make one point that I disagree with you on.
MOORE: Ali, when you started -- said at the outset, you think that these automatic cuts are, you know, a bad way to deal with the budget. You know, I actually -- number one, we have not seen Armageddon. Right? I mean, a lot of people thought it was going to be terrible.
MOORE: And I'm not sure it's such a terrible thing to start this deficit reduction process that we have to go through by just asking every agency of government to cut their expenditures by 4 or 5 percent. You know what? And you said it. They're finding ways of doing this, become a little more efficient, saving money on conferences and paper costs.
MOORE: You know, businesses do that all the time.
VELSHI: Yes, I guess it's the methodology that I didn't like.
MOORE: That's right. Right.
VELSHI: It's the sledgehammer approach. I agree. I mean, we have to find ways to do it.
MOORE: OK. I think we're going to get hurt.
VELSHI: God, there's too much agreement going on this show. Guys, good to see you. That's the end of the segment.
Stephen Moore, our good friend from the "Wall Street Journal" and John Avlon, a CNN contributor and senior columnist with "Newsweek" and "The Daily Beast."
Well, it was another -- never mind as a sky not falling, it's another record-breaking week for stocks. Now you would not know it by looking at the floor of the New York Stock Exchange. Gone are the thousands of traders frantically placing buy and sell orders with hand signs like they were back in the old days. This is 1987. It's all high-tech now. And what that means for you, next.
VELSHI: Things have changed in the stock market over the last 30 years or so. There are algorithm-powered robots trading and moving the market. Some estimates put their activity at 70 percent of all trading volume, and that's got a lot of people scared.
VELSHI (voice-over): Once upon a time, a regular investor called his broker to buy shares in a company. The broker then called that order into a trader on the stock exchange floor. And for that, you paid the broker a substantial commission. That was then and this is now.
Today floor traders are becoming a thing of the past. The majority of stock trades in the United States aren't even made by human beings. They are made by computers. And the time it takes to execute your stock trade is dramatically faster and the commissions are dramatically lower.
In the 1990s investors started migrating online to trade. For the first time we had access to real-time market information and could trade in real time. That innovation gave birth to the individual day trader.
But when it comes to innovation, big-time institutional investors are leaps and bounds ahead of us. They are using superfast computers, running complex mathematical algorithms. There are so-called high- frequency trading firms that now use superfast connections to take advantage of stock movements measured in fractions of a penny within fractions of a second.
And they do it countless times a day. You can't do that from home. In fact, up to half of all trading volume on exchanges is now taken up by such high frequency trades. So where does that leave the little guy? Well, many would say at a disadvantage. Some would say the little guy has always been at a disadvantage.
VELSHI: And for retail investors who did say invested in the stock market over the last four tumultuous years they saw a gain in the S&P 500 of 130 percent. So disadvantage or not, that gain is all that matters to some people.
I'm joined by Christine Romans, host of "YOUR BOTTOM LINE", and Camilla Sullivan, the writer and producer of a new film called "Ghost Exchange" that focuses on high-speed trading.
Here's a clip from your interview, Camilla, with Seth Merrin, owner of Liquidnet, a so-called dark pool that allows institutional investors to trade large blocks of securities without wild swings in prices.
(BEGIN VIDEO CLIP)
SETH MERRIN, FOUNDER AND CEO, LIQUIDNET HOLDINGS: We continue to invent things faster than the regulators can understand it and faster than we have the ability to assess the risk of it. So what happens and what has happened is that the industry makes a tremendous amount of money creating these new types of products until it blows up the world.
(END VIDEO CLIP)
VELSHI: Wow. I didn't even know that there was a movie on this. What made you even think that this would be something that you would make a movie about?
CAMILLA SULLIVAN, WRITER, PRODUCER AND DIRECTOR, "GHOST EXCHANGE": It's such a complex topic. It's so hard to get your head around. I figure that, you know, the movie medium as a documentary is probably the best way to bring this discussion mainstream.
VELSHI: It probably is. OK. So let's start by bringing it mainstream right now. If you had a little bit of time, how would you explain to my viewers the perils of this type of trading.
SULLIVAN: Think about it this way. If you have a car that can do 200 miles an hour, should you drive it 200 miles an hour? No. Because you've got a speed limit on the freeway. This is like a freeway with no speed limits and some people have Ferraris and some people have Camrys.
VELSHI: Just to be clear, the average investor, the person watching me right now, Christine, cannot get that Ferrari, for trading. This is not something that you can compete with. If you're the most active day trader going, this high frequency trading can trigger a flash crash that you can have nothing to do with.
ROMANS: And these are systems that are very closely guarded by the big companies that use them. And in some cases, it's brainiacs at MIT who for their -- for their final project, they're coming up -- I mean, there was one time we profiled a kid who's made something called the $10 million black box. We said, why did you call it that? He said, because I'm hoping that Goldman Sachs buys it for $10 million.
ROMANS: And I'm not going to tell you what's in it. It's something that -- I mean, look at it this way. When I first started covering markets, right, people used a grid chart and they'd chart it out and they would look at three different or four different or five different kinds of commodities and they would see the relationship between them and place trades in them. These computers do that with hundreds and thousands -- like a human isn't doing it. A box is doing it.
When I first started covering markets, the -- imagine the Atari 2600 when we were kids. Right? This phone -- the technology has changed so much, this phone has 500 million times the power of that 2600 -- Atari 2600.
ROMANS: That technology has been applied to trading.
ROMANS: So what we did that was the Atari of when we were learning how to trade is now a 500 million times that complex. Am I right?
SULLIVAN: Absolutely. When you look at the complexity, if you look at the price of Disney in one second, there are 30,000 price changes in one second of Disney stock. What's the price?
VELSHI: So now here's my main question here. Because we're talking to people about whether or not they should have been invested over the last four years and whether with the traditional measure of a stocks value the price to earnings ratio being lower today than it was four years ago, whether you still should be invested.
So given all -- let me ask you this first. Is the deck stacked against the individual investor?
SULLIVAN: The deck is stacked against a day trader. I personally believe the days of day trading are over. I think for retail investors, you have access to firms like Vanguard and others who will manage this for you who do have the superpowers for you. But trying to do it yourself and thinking that you're going to outday trader, $10 million black box, you're dreaming.
VELSHI: So, Christine -- and there's been a lot of pushback. You know, last week we did a show that told people you need to be invested because there's no other game in town because the Fed has pushed interest rates to the point that -- either you buy a house or you get into the stock market. This is the kind of stuff that makes people not trust the world. Should they not trust the world?
ROMANS: Well, the regulators are looking at it. And I think -- I mean, the market has always moved ahead of regulators. I think that we all agree on that. Right? I mean, there's no question. I mean, and when it was people, people saw it -- just when you look at the computerized trading versus hand to hand people, when people were trading we always said it's the deck stacked against the little investor, because now they're front running and they're doing -- so little -- small investors have always worried that the system is so big and complex that it's bigger than they are.
VELSHI: I mean, I hate to sound like an old funny daddy but when Christine and I worked on the floor of the New York Stock Exchange there were 6,000 traders. Were things fairer when people trade at stocks as supposed to computers trading stocks? And is that a silly argument because it's 2013, computer do everything?
SULLIVAN: No, it's a great argument. It's certainly easier to regulate. I mean, when they wrote a lot of the regulations, they used the word instantaneous or what was instantaneous means talking to you.
SULLIVAN: Now instantaneous is the speed of light and if my service is closer than yours, is it half the speed of light? So it's just the fact that technology has leaped from our ability to regulate.
VELSHI: All right. This is not an argument against investing but it is an argument about thinking that you can compete with the big boys if you are an active trader. That deck is stacked against you.
Camilla, good to see you. Thank you so much. Camille Sullivan is the writer and producer of "Ghost Exchange."
Of course, Christine, host of "YOUR BOTTOM LINE."
Coming up, look at this. It is a two-headed bull shark discovered by a fisherman in the Gulf of Mexico. Creepy. Doesn't have anything to do with money, but the phrase two-headed bull shark struck me as a perfect way to describe the stock market right now. But -- is it time to get out of the water? We'll talk about that, next.
VELSHI: The stock market continues its bull run, but does that mean the entire economy is set so soar? This week the S&P 500 was trading above its all-time closing record which was set back in October 2007. This matters to you because you probably have 401(k)s and IRA funds that mimic the index.
It is up 10 percent in just the first three months of the years. Some years you'll be lucky to get 10 percent in an entire year. Those of you who stayed invested sometime -- from sometime around when the market bottomed out in March of 2009 would now have a gain of about 130 percent in four years.
And on top of that, the Dow just wrapped up its best first quarter since 1998. But I can tell from my tweets that many of you still aren't buying it and that's in part because of a disconnect that some of you think exists between this bull market and the broader economy. Despite 36 months of private sector job growth and a stock market that's more than doubled, folks are wary or they don't have the money to invest or they don't trust the markets or they don't trust governments or banks. So they figure it would just be dumb to buy into a record-setting market.
Look at this. Despite four years of almost constant gains in the market, 55 percent of you say that investing even $1,000 in the stock market is a bad idea. Needless to say I couldn't disagree with you more. But the more important question isn't necessarily when you should buy. When a market is on a tear like this, it's when you should sell.
Remember, you don't make any money until you sell, but a rising market can make you greedy. You fear getting out too early and losing out on the next bull run. One thing you can do is set a target selling price. And that's not easy to decide what to set it at. Some say if you lock in a 20 percent gain you're doing pretty well.
Carter Worth is the managing director and chief market technician at Oppenheimer Asset Management, Ned Riley, a good friend of our show, is the chairman of Riley Asset Management, Amy Smith is a market commentator in Investor's Business Daily and the author of "How to Make Money in Stocks."
Amy, let's start with you. Thinking about the market right now. Not right now but just generally. How should an investor decide when to sell? I mean, all I ever get is tweets and questions about, should I buy this? Nobody ever ask me whether I should sell something.
AMY SMITH, MARKET COMMENTATOR, INVESTOR'S BUSINESS DAILY: Well, first, you should always consider selling a stock if it falls 7 to 8 percent below what you paid for it. That way you're really protecting your portfolio. For instance, if you take a 33 percent loss in a stock, it's going to take you a 50 percent gain just to get back to even again so that's too big of a loss. It's hard for all of us to come back from that.
OK. That's the first thing. The next thing is to think about offensive selling. And this is the fun part. This is when we get to take profits off the table. You're going to do that mostly -- most stocks that have great earnings and sales will run up on average, historically, about 20 to 25 percent before they begin pulling back in price. So you might want to think about locking in profits to 20s to 25 percent.
The next is the individual investor must just take a look at what the average indexes are doing and what individual stocks are doing. Now if there's heavy volume that comes into the market and the indexes are heavy duty selling that comes into leading stocks, the institutional investors heading to the sidelines. And of course we want to do with the institutional investors are doing. Because three out of four stocks will follow what the general market is doing. So you don't want to argue with the market.
SMITH: You just want to get out.
VELSHI: All right. Ned, you seem to think selling it right now despite the run up that this market has is a terrible idea. What would have to happen for you to decide it's time to sell some stocks.
NED RILEY, CHAIRMAN, RILEY ASSET MANAGEMENT: Well, selling stocks and selling individual stocks actually goes to the same equation. It's mainly profits and where profits are going. And the first thing I tell people is to watch the momentum and earnings year over year. If there is a deterioration in the growth rate of a company's earnings, then one should be wary because analysts will justify one shortfall on earnings, but the second one is problematic.
So I tell people maybe take some profits off the table with that first warning signal and wait for the next. The second issue -- profits but it's with accounting changes. Look for companies that are doing some accounting changes that enhance short-term earnings. This is what I call fluff reporting. And basically when you see a company that's starting to change the way in its methodology and enhances short-term earnings, that's a problem.
The third thing I tell people is watch Wall Street estimates. If they start to deteriorate, there's obviously a growing concern about the future of the company. But more important, look for the outliars. Those that are most pessimistic on a stock. And see if the rational for that pessimism is there. If it is there, then I would suggest, if you agree with them, that you start to sell that stock immediately.
RILEY: Regardless of what Wall Street says.
VELSHI: All right. But the interesting point that I'm taking from everything you're saying is that you're asking people to do some research about the companies. Don't get caught up in momentum plays about the market in general.
Carter, you've got a different view about what the stock market is going to do. You say the market is in for a correction pretty soon. Maybe between 6 and 9 percent. You brought these chart. It's a two-year chart of the S&P 500. Now if you want to look at this chart broadly you can say that in the last two years this thing has done nothing but go up and it looks fantastic.
But you have a warning, those red arrows.
CARTER WORTH, CHIEF MARKET TECHNICIAN, OPPENHEIMER ASSET MANAGEMENT: Right. Well, so in principle we're in a very bullish phase. Right? The market has been going for one year, two years, three years, four years, it's a great bull market. But history shows that when you have very euphoric bull phases, they give way to corrections. It's a normal thing. And in fact what Amy cited was very prudent. There are rules for offensive selling, if you will. And she cited 20, 25 percent.
The stock market right now is annualizing. It's somewhere between 40 and 70 percent.
WORTH: Depending on what index you want to look at. So from a November low, we're up about 20 percent. And at this point, this is exactly where a normative pullback or correction or pause occurs. In fact in the last two years or three years, we've had several between 10 and 15 percent pullbacks. Last September it was 12 percent. April and so forth. A similar kind of thing.
So is this a time to be getting more aggressive or to be actually harvesting some gains? Many things are up much more than 20 percent. So I would put it in this context. Intermediate tops or bottoms, (INAUDIBLE) troughs. Intermediate tops are typically identified by rapid price increases. Just what we're seeing now while everyone is trying to get in. Just as intermediate bottoms are typically identified by rapid price declines when everyone is desperately trying to sell and get out.
VELSHI: Very good conversation. To all of you, good advice not exactly same advice but if you're listening to this, it will give you some advice on how to sell, when to buy and what could happen to this market.
Carter Worth is the managing director and the chief market technician at Oppenheimer Asset Management, Ned Riley is the chairman of Riley Asset Management, Amy Smith is a market commentator with Investor's Business Daily and the author of "How to Make Money in Stocks."
Take a look at Ben Bernanke. He doesn't look that scary but he's got a lot of people worried. Should you be worried, though? Richard Quest joins us after the break for a little "Q&A." Stick around.
VELSHI: It's time for a little "Q&A", Quest and Ali, with my good friend, Richard Quest, host of "QUEST MEANS BUSINESS" on CNN International. He's spoiling for a fight.
One of reasons we're seeing this bull market here in the U.S., Richard, is because of intervention by the Federal Reserve pumping $85 billion a month into the economy, keeping interest rates low and that's pushing money out of bond markets and into stocks. It's why a lot of people think America's central bank is artificially fueling the bull market.
So today's question is, are the world's central banks too powerful?
Let me go first, Richard, for a change. Give me 60 seconds on the clock, starting right now.
All right, Richard, I take issue with the premise of the question which was your idea. The too big or too powerful question is silly. If central banks weren't as powerful as they are, the United States would have been sent back to the Stone Age by the financial crisis and Europe would be decimated by its subsequent debt crisis.
Central banks exist to set monetary policy, manage currency and interest rate levels.
RICHARD QUEST, HOST, CNN'S QUEST MEANS BUSINESS: No. No.
VELSHI: Promote economic growth and ensure adequate money supply. And they do this two ways, Richard. You know they print money, which puts more of it into the system, makes it cheaper to borrow money. That's why America is seeing a housing boom again after years of bust because mortgage rates have never been lower.
But when prices across the board start to rise, inflation, central banks take money out of the system making it more expensive to borrow without central bank intervention, Richard, recessions can become depressions. That's why they can be good or evil, but they must be powerful and independent of politics otherwise they would be useless.
Richard, what are you huffing and puffing about?
QUEST: If you take a strictly narrow definition of central banks, as you have blanketly done so, then, yes, they are fine. But the problem, Ali, is that central banks today have a wider and widening remit. The Fed with its 6.5 percent intermediate threshold on employment, widening the remit. The Bank of England with its vast new supervisory powers, widening the remit.
The ECB with its OMT policy and with its new supervisory powers, widening the remit. The IMF chief economist, Axel Weber, the former president of the Bundesbank, numerous people are now saying there's a contradiction between these widening remit and central banking dependence. Politicians make those decisions, not unelected central bankers.
Be warned, there is a contradiction, there is a conflict, and they are too powerful.
VELSHI: That is an almost perfect argument if I had any idea what widening the remit actually means. But, boy, you made it really well.
Richard Quest, champion of his debating union wherever it was, if he ended up going to school.
Richard, the banks that are too big to fail before the financial crisis are even bigger today. But one person's too big fail is another's buying opportunity. Could the banks that drove the U.S. into recession power your portfolio's recovery, up next.
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HENRY PAULSON, FORMER TREASURY SECRETARY: For market discipline to effectively constrain risk, financial institutions must be allowed to fail.
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VELSHI: That was 2008. Five years later the banks, the U.S. government rescued are still too big to fail.
(BEGIN VIDEO CLIP) BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: Too big to fail was a major part of the source of the crisis. And we will not have successfully responded to the crisis if we don't address that problem successfully.
(END VIDEO CLIP)
VELSHI: In 2007 the biggest five banks held $6.2 trillion in assets equivalent to 44 percent of America's economic output. Today it's $8.8 trillion or 56 percent of our GDP.
Dick Bove is a bank analyst with Rafferty Capital Markets. Dick is a banking expert.
You say the U.S. needs big banks. Did you ever agree that they were too big to fail or needed to be less big?
DICK BOVE, BANK ANALYST, RAFFERTY CAPITAL MARKETS: No, I think it's very definitely needed to have banks that are too big to fail, if the United States wants to be an effective competitor in the global financial markets. Remember, the United States is the biggest, strongest financial -- financial entity in the world. But they are rapidly losing that position. In the last couple of days, the last eight, 10 days, the number of Chinese banks have reported their earnings and what that shows is that each one of the top four banks in China are earning substantially more money than the top four banks in the United States.
The Chinese are gathering greater control of the global financial system and as they move to push the dollar aside with the one, their currency, what we're doing in the United States is we're trying to shrink ourselves out of the way. It's almost as if we have a death wish for our financial system that we want to be the next Great Britain with the next pound while the one takes over and pushes the dollar aside.
VELSHI: So, Dick, you don't think -- you don't think there is -- do you think there's any risk in banks being too big to fail or none whatsoever?
BOVE: There is a great deal of risk in banks being too big but we must take that risk. That's the difference in the thought that I have with your commentators. In other words, they believe that you should run for the hills and not accept risk and not accept the -- if you will, the cost of risk.
We must accept the cost of risk because if we don't our financial system which is shrinking badly, shrinking dramatically relative to the world financial system, our financial system will no longer dominate the global financial markets. That is not good for the United States. It means that the United States will have to repay its debt, which is something that we cannot do. So the net effect is they have to think beyond simply what the costs are when these big banks fail which obviously admittedly is very high and they have to understand that the United States has to absorb it. VELSHI: OK. So instead of just being on the receiving end of this, can the little guy benefit from it? Financial stocks are coming back. But they still actually lag the broader market. Here is a chart, the blue is the S&P 500, the red is financial stocks. The pattern is roughly the same. They moved in some degree of lock step, but the gains haven't been anywhere near the broader market, Dick. Tell me what your thoughts are on that.
BOVE: Well, first off, over the last 18 to 20 months, the banking stocks have outperformed the market. If you had purchased bank stocks, you know, a year ago, a year-and-a-half ago, 20 months ago, you would have been making more money than if you had bought the broader market. Secondly, I will give you a shocking statistic. Let's assume that you're a mutual fund manager and you put $10,000 a week into purchasing Bank of America, one of the worst of all the stocks, correct? Of all the bank stocks.
If you had bought it every week from the day that Bear Stearns failed to the present you would be sitting now with a profit now of about $300,000, so you didn't lose money in terms of buying these stocks on the dollar cost averaging basis through this period, and if you were buying them, over the past 12 to 18 months, you beat the markets soundly.
VELSHI: Should you be buying them now assuming you think you should be getting into the market generally?
BOVE: Yes, I do think you should be getting into the market generally and at the present time you have a large number of banks in the United States selling at discounts to the book value. The book values are actually rising because of the boom that's occurring in housing, so the net effect is not only are these stocks selling at discounts to their book values, but the book values are understated because as housing prices go up, all of this distressed assets on the backs -- the books of the banks are in a position where theorizing, so I think that bank stocks are incredibly cheap, and I think that basically you're looking at least at a 20 percent rise between now and the next 12 months in these issues.
VELSHI: Dick, good to talk to you as always. Thanks very much for joining us.
Dick Bove is a bank analyst with Rafferty Capital Markets.
All right. I suggest you, you know, look into buying stocks. I haven't bought a new car in a while. I drive a 2005 Nissan Xterra SUV. This car is a little bit different.
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CAROL GHOSN, CHAIRMAN AND CEO, NISSAN: People trying the electric car first, they never know when it's on or off. There is no noise, no vibration. No -- no smell, nothing at all.
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VELSHI: Nissan CEO says this car is the car of the future. So why aren't you buying them? I'll take a test drive next.
VELSHI: From the New York Auto Show I'm Ali Velshi. This is YOUR MONEY. Well, actually I'm not in the New York Auto Show. I am outside the New York Auto Show because this is a Nissan Leap.
Here, look, here's something for you to do. Take a look. Look for the tailpipe. Get lower, get lower, and look for the tailpipe. There isn't one. This is a fully electric, zero emission vehicle. I went for a test drive with the head of Nissan.
(BEGIN VIDEO CLIP)
GHOSN: It's always amazing because people are trying the electric car first, they never know when it's on or off.
GHOSN: So this -- it's the same. There is no noise, no vibration.
GHOSN: No smell, nothing at all.
VELSHI: What sort of feedback are you getting from people? First, what's the feedback you get why people come in, try it out and don't buy it? What's the thing that stops them?
GHOSN: Well, you know, people who try it and don't buy it are waiting. They're just saying, look, this is a good idea.
GHOSN: But let me make sure, let me discuss it with my friends, my neighbors, let me try people who bought electric cars, let me try to see where are the charging stations.
GHOSN: They're just testing it. This is a car which in my opinion is going to carry a lot of brand and is one of the big engines of growth for the -- for the future. I don't think on the short-term it makes any big impact for the moment on our sales. You know, Nissan is approaching five million cars sold a year. Fifty thousand --
It is not going to make a big difference for the -- for the company.
VELSHI: Right. Right.
GHOSN: But in terms of technological image, in terms of environmental image, in terms of particularly potential for the future, it is a great car.
VELSHI: We've talked in previous years about there being a good lineup, a good offering. Obviously your lineup has increased dramatically in the last few years as you promised it would. But credit -- availability of credit was a real hindrance to your business. Are we done with that in the United States? Is there still a remnant of people who want to buy cars and in your opinion should qualify for loans who are still not getting them?
GHOSN: No, I don't think so. I think -- I think in the U.S. there have been a dramatic change. I think the problem that we have seen in 2008/2009 are really way behind us today, and I don't think it is a problem that today is a concern for car manufacturers.
VELSHI: Love taking test drives.
And thanks for joining the conversation this week on YOUR MONEY. We're here every Saturday 1:00 p.m. Eastern, Sunday 3:00 p.m., and weekdays at 3:30. Find me on Facebook at Faceboo.com/alivelshi and tweet me, my handle is @alivelshi.
Have a great weekend.