NANCY LAZAR: Absolutely.

CONSUELO MACK: Higher energy prices, higher interest rates, the market is getting very concerned about both. Are you?

NANCY LAZAR: Yes. We’ve gone for quite a while now where the economy seems to be pretty resilient, despite those headwinds for economic activities, but I do think as you go into 2006, it will be more and more difficult for the economy so show, say, roughly 3.5% GDP growth, which is pretty good. I think as we go into 2006, increasingly growth will weaken, probably led by the U.S. consumer.
 As you say, energy prices, natural gas prices, gasoline prices, we're just moving into the heating season where people will be getting bills.
 How can Christmas be good in the face of all of these extra costs that the consumers are going to have to pay?
 In addition, you've got interest rates going up, the federal reserve is tightening up at the same time. Housing has been one of the strong supports for economic activity, but that's probably going to fade some -- not a lot, but probably will fade some going into 2006.
 So that will also be less support for growth going into the New Year.

CONSUELO MACK: So interestingly, though, you're not really -- you don't have a dire prediction about the economy? You don't think we're going have a recession, and you don't think it's going to be really that bad an economic environment, right, for consumers or business or for home owners?

NANCY LAZAR: No, I would call it a mid-cycle slowdown, somewhat of a pause that refreshes. Easing some of the strains right now on the system. I know it feels great that home prices are up a lot, but if things go up too quickly it can end badly.
 The Federal Reserve is trying to cool the economy, cool home price appreciation, and I think in the long run, it will make housing a much better long term investment.
 I view the pause as constructive, inflationary pressures are likely to fade, bond yields are likely to come down, the Fed is likely to stop tightening, and quite frankly, in that environment will probably be pretty good for stock market.

CONSUELO MACK: Let me ask you a little bit about inflation. We've had a lot of fed officials the last several weeks saying inflation is near the high end of the comfort level for the fed, and they've been doing a lot of jaw boning. Number one, are you concerned about inflation very much? And number two, are you afraid that the fed might overreact and tighten too much and in fact do more damage to the economy than you're predicting now?

NANCY LAZAR: Short term there is an inflation problem. No question the next couple of months, the inflation data are going to spike to probably the highest year in year changes probably since the early 1990s. But I do think it's a short-term problem. I don't think, one, the Fed will allow inflation to get out of control, and, two, U.S. consumers can't afford to pay these higher prices. You're already seeing stores react to it. There's already talk going into the holiday season, companies are going to be cutting toy prices again. Consumer incomes are getting squeezed by these higher energy prices, and as a result, consumers just say no. So short term, yes, there is a problem. But longer term, because the consumers, I don't think, are going to buy if price goes up. And secondly, companies aren't getting really big wage increases, which is a reason why consumer incomes are under pressure. So if companies don't give real big wage increases, historically it's very difficult for inflation to be ingrained in the system.

CONSUELO MACK: So as you said earlier, you think actually this is going to be pretty constructive for the stock market. How constructive and when? Aside from Tom's energy sector, when are we going to see some good performance in the stock market?

NANCY LAZAR: Well, the problem for the stock market is, as you suggested, the Federal Reserve officials are talking quite hawkishly. Quite frankly, that's their job.
 The last thing we want is for the fed to allow the inflation to come back as it did, say, in the 1970s. That's not really a healthy environment for financial assets, or individuals. So it’s-- the right thing for the Fed to be hawkish. And quite frankly, they're going to be hawkish right up until the last minute, until it's perfectly clear that they can stop and potentially even lower interest rates. So the key for the stock market is for the Fed to stop tightening my best guess -- knock on wood -- right -- they hopefully will have their last tightening as you go into December. Again, this is all very contingent on inflation, and a slow-down in the economy, but if that happens, hopefully 2006 you can have a significantly better stock market than we've had over the past couple of years.

CONSUELO MACK: That's right, that's a big if as far as Fed is concerned.
 Tom Petrie, we're talking about big trends, and energy has been the most dynamic trend, really, that we've seen in the last three, four, five years. You know, just looking at your charts, we see something very interesting happening as the global demand has risen, as I said, kind of seemingly inexorably, but the production of oil we see out there is declining.
 So where does that kind of intersect, or how is it going to intersect?

TOM PETRIE: Well, the chart we show is that's what the existing base is doing, and it's coming down. There are some new fields coming in, but the timing of bringing those in becomes critical at this point. We're going to be struggling to accommodate that growth in demand out of China and India especially. Under some scenarios, we can see it working out okay, but it takes some of what Nancy talked about, a little bit of slowdown in the economy, some feedback into China, in terms of demand for Chinese exports, is all very healthy in terms giving us positive refreshers in energy as well. Frankly, some back up in prices -- what we learned in cycle 25 years ago is if we stay at too high a price too long, we do trigger long-term demand elasticities that can be very painful. So as I look at it right now, I think the bulk of the price increase we've had in the last 18 months is a step function, and it's going to be with us, but hopefully, we're going to see prices somewhere between 40 and 60 most of the time, but not a whole lot higher, other than when we have unusual circumstances. Right now, the hurricanes have done very serious damage, and that, along with what the approaching winter, makes me somewhat cautious about whether we've seen the peak prices yes -- yet.

CONSUELO MACK: In other words, we may not have seen the peak prices yet?

TOM PETRIE: We may not have. I certainly hope we have, but I wouldn't sit here and say I don't think we're going to see higher prices, because we may.

CONSUELO MACK: So the demand that we've seen -- I know Nancy has been tracking globally as well, and certainly domestically, the fact that demand is easing, could that take the pressure off prices significantly to give us some relief on the consumer end, at any rate, and on the business end?

TOM PETRIE: It could, but as we've also seen, really Secretary Bondman, the Energy Secretary, is very concerned, and is out there talking about consumers doing all they can, because they recognize, we've eliminated so much near-term produceability in the Gulf of Mexico, that we could have a serious problem this winter if it's colder than normal, and there's a chance it's going to be colder than normal because usually there's an inverse relationship -- warm summers bring cold winters.

CONSUELO MACK: Now all of this said, you told me earlier that this is one of the most transformational periods that we probably have witnessed since World War II in the energy industries, and one of the most exciting from your point of view, as an energy expert.
 What's going to get transformed?

TOM PETRIE: Well, we're probably within five or at the most 10 years of a global peak in conventional oil production. And at that point, we've all got to get more efficient in our consumption. Americans, Europeans, Chinese, Indians, et cetera. And it will be transformational because we've relied on relatively cheap energy growing volumes of cheap energy since the end of World War II. We're going to have to learn how to go to alternative fuels, how to work with clean coal, ultimately with nuclear, and it's going to be a different pattern of development, travel, consumption of energy.

CONSUELO MACK: Energy stocks have been the support for the market now for a couple of years. What's the outlook for the energy sector, up more than 100% since end of 2003?

TOM PETRIE: It's still bright. There are a lot of companies very dedicated to helping solve the problem, bring on new supplies wherever they can. There are companies bringing in products to develop liquefied natural gas, a great transitional fuel for us. I expect this sector to be center stage the balance of this decade. When I started as a young analyst in 1971, energy was about an 8% component of the S & P. It closed the decade, opened the next decade, in the high 20s, almost 30% We're at 10% today, and I’m not saying we're going back to 30, but it would not surprise me to see energy, as we defined it in this transformed mode, 20%--

CONSUELO MACK: Which means it's going to go up a lot from here, or the stock market is going to go down a lot more--

TOM PETRIE: Not overnight, but over the course of the decade.

CONSUELO MACK: Frank Gallinelli, real estate, another big factor in building wealth, and when you're on the first "WealthTrack", on July 1, as a matter of fact, you told us that you thought the housing bubble would not develop, number one, and housing, even at these levels, was as attractive what do you think now?  

FRANK GALLINELLI: I think exactly the same as I did then. We’ve seen so much ink spilled over the last six or seven months talking about the impending housing bubble, with some people even predicted 40%, 50% decline in housing prices.

CONSUELO MACK: Some people right here on this very show, as a matter of fact.

FRANK GALLINELLI: And I think we're seeing signs of softening, but I agree entirely with Nancy, that this is not necessarily a bad thing. I simply, however, cannot agree with the doomsayers, with the bubble boys, if you will, that the real estate market is going to collapse. The evidence really isn't there for that to happen. Take a look at some of the data -- over six or seven months of publicity, there has been no stampede to the exits. The data that came out over the last few months, for example, in August, home sales were up by 2%. That was existing homes. That represents 85% of the market.
 Even though the new homes were down by 2%, -- pardon me, 10%, their prices were up.
 I think the most interesting stat came out just a couple of days ago that pending sales, that would mean sales that are expected to close in September and October, were up 3%.
 So there's no sign of a cataclysmic collapse, there's no Hindenburg. There's a soft landing, I think, in the offing.

CONSUELO MACK: Long-term trends-- we're interested in wealth building over long term, and I have seen statistics saying real estate prices, when you take the inflation, an average analyzed return of 1% versus 8% returns for the stock market. You say that they're looking at the wrong figures, as far as home prices are concerned, that you really -- when you consider an investment in a home, no matter -- even now -- that it's still a good investment. Why? What should we be looking at?

FRANK GALLINELLI: There's something that's different about home as a leveraged investment. It's not like buying stock on margin. The inescapable fact is you have to live somewhere, and you have a choice, I think, between paying the mortgage on your property or paying the mortgage on somebody else's, in the form of rent. So you should look at this as something close to a wash. After taxes and over time I think the cost of renting and the cost of paying the mortgage will come fairly close to each other, and even if they don't, the excess you might pay, there are certain perks, the security of your own home and the --.

CONSUELO MACK: The tax deductibility of interest.

FRANK GALLINELLI: And all of the things that come with home ownership. What you're really looking at in the rent versus buy decision, even today, is what are you doing with your down payment? If you're going to stay in a rental, you have the opportunity to invest in something. If you're staying in your home or you're buying a home, when you read -- when you pick up the paper and listen to pundit like me say housing has gone up 3% a year for the last five years -- of course we know it's gone up a great deal more than that -- but let's say we're talking about the next five years, and we say it goes up 3% a year. Let's say you bought a house for $100,000 -- by the way, if you do, please let me know where it is.

CONSUELO MACK: (laughter) Exactly, show us that house!

FRANK GALLINELLI: Mail me the address, please. And you did a conventional deal with $20,000 of your own money. That's $20,000 you don't have available to invest in the stock market. But that $20,000, if the value of the home is going up 3% a year, well, at the end of one year, you've got $23,000, which is a 15% return. It's not a 3% on the increase in the value of the house. It's 15% on your leveraged investment. If there were a different kind of leveraged investment, you really would have to take a much more serious look, and this example, obviously, has all the perils of oversimplification.
 We're not talking about inflation adjustment, costs of sale, opportunity costs and all the rest. But the basic logic is still sound. If you were to stop the next 100 people you talk to and ask them over the last ten years, where have you built the greatest wealth, they're going to tell you, I think, it was in their home.

CONSUELO MACK: Right, or else in an energy investment.

FRANK GALLINELLI: Or an energy stock.

CONSUELO MACK: Exactly. So what happens, Nancy and Frank, if Tom is right about energy prices, and essentially, we are seeing a new higher level of energy prices, and in fact, we have this kind of transformational situation that he's talking about that really is different this time? What happens to the economy? What happens to housing?

NANCY LAZAR: Well near term, it definitely is one of the biggest contributors to the slowdown in the economy in 2006. But the economy has also historically been very resilient. And it's not the level of energy historically that drives the change in economic growth. It's the change in energy prices. So if you can promise me next year energy prices stop going up, then that will be a, albeit at the still elevated level, that will be a plus for the economy in 2007. And the stock market will start to figure that out.
 So can you promise me that energy prices…

TOM PETRIE: That's a tough one. Because, you know, we've still got the issues of what's going to happen in Iraq next year? And if it doesn't go well, what happens to Saudi Arabia. We heard the foreign minister of Saudi Arabia made the point just last week about concern, instability in Iraq could spill into Saudi Arabia. We have those kind of factors to consider. Overall, I have to say, I think the bulk is there, and the second derivative, the rate of change in prices, absent these outside events, were at kind of a new level, somewhere around where we are now.

CONSUELO MACK: And what difference do higher energy prices, what difference are they going to make on looking at your home as a good long-term investment. That's going to be a whole new cost structure built in to owning a home.

FRANK GALLINELLI: I think it's built in to -- as I say, you have to live somewhere, and it's going to be built in to wherever you are. If you're not owning a home and renting somewhere, that cost will be passed on to you anyway. I think, again, it ends up being a wash.

CONSUELO MACK: All right, now, at the end of every "WealthTrack", we ask each of our guests for their one long-term investment, recommendation that you would put in a child's portfolio or some -- a young adult's portfolio for retirement. So, Nancy, what is the one investment that every one of us should have in our portfolio for the long term?

NANCY LAZAR: Because I’m an economist, I’m going to stick with the general market - SPDRs. Exchange traded funds for me -- again, as an economist, not a portfolio manager, equity research analyst -- I’m bullish on the U.S. stock market, I’m bullish on the U.S. economy. As you said, I think the economy has a pause next year that refreshes. I think inflation will stay low, interest rates will stay low, and in that environment, our stock market has been basically unchanged for almost two years. And so I think it's discounting the slow-down that we're going to experience in 2006. It's discounting these higher interest rates. So I think the U.S. market is all right long term.

CONSUELO MACK: And it specifically is the SPDR, which is the granddaddy of all the exchange traded funds, the S & P 500 index. We'll see how hopefully that will work out. Tom, I know you have an energy pick?

TOM PETRIE: I think Devon Energy is a producer. It's a large producer that has a great positioning in the Barnett Shale, and some of the other unconventional gas sources to be developed over the next three to five years here in the United States on shore.
 And in addition to that, they have a great set of projects coming on in the out years, 2008, 9, and 10, West Africa, Brazil, and in Canada, in the oil sands of Canada -- these are the kinds of projects that will help mitigate the tight supply demand situation we're dealing with.

CONSUELO MACK: It's had a big run up?

TOM PETRIE: It has--

CONSUELO MACK: 35 to 70, and it's now running at 63.

TOM PETRIE: That's an outgrowth of having done four major acquisitions and then integrating them well. The foundation they have in place now to keep growing the way they have is solid.

CONSUELO MACK: Frank Gallinelli, I know it's -- we've asked you about this before, and just now, we did: it's still a home.

FRANK GALLINELLI: I'm pretty transparent. But real estate is the thing.
 If you don't have a home, you should have a home. That should be the very first investment that you have. Once you get past that, we'll talk sometime about income-producing property because in my estimation, it's the next best thing.

CONSUELO MACK: But even at today's level you still think the home is the best investment you can make?

FRANK GALLINELLI: Yes.

CONSUELO MACK: We'll leave it there. Frank Gallinelli thanks so much, Nancy Lazar just a treat having you, and Tom Petrie coming in from Denver, really appreciate it.
 At the conclusion of every edition of "WealthTrack" we try to give you one action you can take to build or protect yourself wealth, and this winter, if energy price predictions come true, we're going to need all the help we can get. New heating cost estimates are due out from the government next week, but they are already bad enough. Natural gas, which warms over 50% of American homes is expected to be up nearly 50%, and spike much higher than that in the Midwest. Electricity, which accounts for a third of home heating, is expected to be nearly 20% higher, and home heating oil even more than that.
 So this week's action point: call your utility now to find out how you can lower your gas and electric bill this winter. Now, in past "WealthTracks", we have given you several tips to conserve energy, and we've also mentioned energy-efficient financing available to do so through the federal government, and also some states, and some banks. You can find out about them on our web site, wealthtrack.com. In the meantime, how you get through the winter without breaking your bank? The first step is call your utility and actually ask them about what are called "balanced billing plans." Most utilities offer these plans, which allow customers to spread their heating costs over many months rather than take a big hit in the winter. In addition, many utilities are now exploring other options to assist their customers. They're under pressure to help you. As one official from a big utility told me, the only way to find out what your options are is to call, and don't be afraid to ask for help. So get on the phone, call your utility, and see what you can work out.
 And on that note, we're going to conclude this edition of "WealthTrack."
 Join us next week for another spectacular guest round-up. In a rare television appearance, Bill Miller, the Legg Mason portfolio manager, who holds the record for beating the stock market 14 years in a row, is going to be here to discuss long-term investment strategy.
 He'll be joined by PIMCO’s Paul McCully, one of the gurus of the bond market, and Tim Hayes, Chief Investment Strategist at Ned Davis research.
 Meanwhile, for information about them, our past, and our present guests, their recommendations and our action points, check out our web site at wealthtrack.com
 Thanks for taking the time to visit with us.
 Make the week ahead a profitable and a productive one.