Concerns Grow Over Fannie Mae and Freddie Mac
ALI VELSHI, CNN HOST: Welcome to YOUR MONEY where we look at how the news of the week affect your bottom line. I'm Ali Velshi. Coming up on today's program, stocks tumble as concerns grew over mortgage companies Fannie Mae and Freddie Mac this week. The Dow, S&P; 500 and NASDAQ are all if a bear market. But many on Wall Street think things look brighter ahead for investors. Find out what this means for you. Plus, oil hit a new record this week on news of tension in Iran, the possibility of renewed violence in Nigeria, and a planned labor strike in Brazil. But the U.S. doesn't get the majority of its oil from any of those places. We are going to tell you where we get our oil and what impact that's having on your wallet. And breaking our foreign oil habit was a hot topic on Capitol Hill and on Main Street last week. We're going to hear two energy plans. One from an oil tycoon and from a congressman that could get us back on the right track. But first the stock markets took a beating this week. Susan Lisovicz joins us now from the New York Stock Exchange -- Susan.</s>SUSAN LISCOVICZ, CNN CORRESPONDENT: Ali, as you know the stock market is a reflection of the economy and there were worrisome news stories out this week relating to the economy. Oil is getting closer and closer to $150 a barrel. It went over $147 for the first time Friday and then mounting tensions about Iran and the possibility that if conditions deteriorate it could close the Strait of Hormuz. The passage way for 40 percent of the world's oil. That would make supplies tighter and prices higher. And then there was the freefall of Fannie Mae and Freddie Mac. Shares of the two government-sponsored lenders lost about half of their value this week alone. Amid reports that the Bush administration was mulling over the possibility of taking over the giant home lenders. Fannie and Freddie, together, own or guaranty nearly half of all U.S. home mortgage debt. Both stocks paired their losses late Friday on a report that Federal Reserve chairman Ben Bernanke offered them access to the emergency discount window. That is already open to troubled Wall Street firm. And that made investors even more nervous about the financial sector which also took a pounding. We get quarterly earnings reports from financial companies in just a few days -- Ali.</s>VELSHI: All right, thanks, Susan. While stocks took another hit this week, many investors are concerned about the impact of the slowing economy and the credit crunch on upcoming earnings reports but David Bianco, U.B.S. chief market strategist says fear not. He joins us now with a very bullish prediction on the markets for this year. David, thank you for being with us. You have a very, very bullish outlook on the S&P; 500, which is 500 of the biggest companies in America. And the types of stocks that many of our viewers are invested in through their 401(k) or their IRA. You think it might be up 25 or 30 percent by the end of the year.</s>DAVID BIANCO, CHIEF MARKET STRATEGIST, UBS: Yes, thanks for having me. I do think from these levels the market's going to be up 30 percent by the end the year and there's a very bullish story out there about this market. It's an untold story, and that is the S&P; 500 is very different from the U.S. economy and many of these challenges facing the U.S. economy, the U.S. consumer. And even many of the mortgage finance companies. Most the S&P; 500s are well removed from these problems. Continue to generate robust earnings growth and with these interest rates we think we're looking at some of the one most attractive --</s>VELSHI: Let's talk about that, because often people come on this show and tell our viewers that we're not professional investors. That if you don't know where to park your money park it in the S&P; 500, in the Spiders, the exchange traded funds that invest in the S&P; 500 or in index funds because it's thought to be fairly diversified because it's 500 companies. But the biggest thing weighing on people's minds on a daily basis today is still energy prices. How do high oil prices, high energy prices affect the performance of the S&P; 500 companies?</s>BIANCO: Well, the S&P; 500 right now, the largest sector from a market cap as well as an earnings standpoint is the energy sector. It's overtaken the financial sector. So one of the biggest challenges this economy has is high energy costs and yet the S&P; 500 benefits from high energy prices and clearly the energy sector does but also there are many industrial and energy companies that benefit as suppliers to the energy sector. There's going to be a lot of investment in this country and world wide to produce more commodities and to use energy a lot more efficiently and look toward industrials, materials, and tech companies. Many tech companies actually can benefit from this trend.</s>VELSHI: Now, there are still some people who say you can't have an economic recovery if the financial sector is in the turmoil that it's in. We still don't know how bad things are for the financial sector. We still don't know if some of these major banks will have big write-downs related to the subprime mortgages and those secondary investments that they sold because of those. How does that affect your call on the markets?</s>BIANCO: Well, correct, American mortgage finance has a lot of challenges to work through. And certainly that's going to keep the U.S. housing market damp for probably quite some time as we expect here at UBS. However the view for the market is more driven by the outlook for the foreign economy, business investment on industrial capital goods, information technology capital goods. And this is where we feel confident that there are good opportunities and while I do believe the entire S&P; 500 is significantly undervalued including the financial sector; my three preferred sectors are energy, industrials and technology.</s>VELSHI: Let me ask you about this, we've taken a recent poll, CNN and Opinion Research Corporation and we've found that -- our respond that 75 percent of them thought that the United States was in a recession right now and while that is down a little bit since the last polled them in April, the bottom line here is that we always hear that the U.S. economy is so dependent upon consumers and their sentiment. How does that affect what you think about the markets?</s>BIANCO: Well, here at UBS we believe that we're in a recession, the United States right now. Things early in the year held up a bit better than expected. We think we're in a recession now and we've got concerns for the outlook. What I would say is -- the thing is that the economy's very different from the S&P; 500. And we do things that, overtime, we will have a strong rebound in the S&P; 500 as you typically do when the economy has recessions and the worst of the fears blow over.</s>VELSHI: OK so you're saying don't use the S&P; 500 as a proxy for the economy. If our viewers are invested in that, stay invested in it. If they're not go ahead with that, because as we come out of this recession, you think there will be a big benefit in stocks. Is that a fair characterization of what you said?</s>BIANCO: Yes and I would elaborate. The U.S. economy has these concerns for the energy and the outlook the consumer spending what's often not appreciated is the S&P; 500 has far less exposure to consumer discretionary spending than the overall U.S. economy. The U.S. economy consumer discretionary spending is about 25 percent of it. For the S&P; 500, no more than 15 percent of its profits come from consumer discretionary spending.</s>VELSHI: Very interesting points that you've made, David, thank you for joining us. We really appreciate it. David Bianco is the chief market strategist at UBS. Well coming up next on YOUR MONEY presidential plans. Can the next president of the United States really reduce the deficit and balance the budget? And at what cost, we're going to have a look next.