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compromised on health care but president obama is not. that's the problem. we'll talk to leading republican senator dr. coburn and it's the silent stock market rally, eight straight days, nobody's talking about it. this could be the greatest story never told. we have two titans of wall street, famed investor giving us their new bull market strategy. the fdic insurance fund is back at savings and loan crisis level with over 400 banks on the problem list. is your money safe? fasten your seat belts, everybody. "the kudlow report" begins right now. good evening, everyone. i'm larry kudlow. welcome back to "the kudlow report" where we believe free market capitalism is the best path to prosperity. we have live pictures from outside the kennedy library in boston this evening where ted kennedy's casket now lies.

the library will be open for public viewing tonight and tomorrow morning. the private memorial scheduled tomorrow afternoon when senate colleague john mccain is scheduled to speak. president obama will deliver a eulogy at a funeral on saturday before ten did i's casket will be flown to arlington national cemetery near washington where he'll be buried near the gravesite of his brothers john and robert, and may they all rest in peace. so a question this evening, will the passing of the liberal line of the senate bring the end to a government takeover health care, or can democrats now rally behind something called kennedy care? cnbc's chief washington correspondent john harwood joins us with the details. hello, john. >> reporter: thanks, larry. this was a day for continued reflection on the life of senator ted kennedy whose motorcade containing his casket made its way across to the library while some constituents lined the road and clapped. but it was also a day for

calculation in washington about the direction of health care reform, also a calculation in massachusetts, two moves in particular under consideration by democrats. one is for governor duvall patrick to ask the legislature to change the law so that a successor to ted kennedy can be appointed immediately to provide a potential vote in the senate on health care reform that would be possible but it's embarrassing for democrats because they changed the law to prevent a republican governor from making such a pick just a couple of years ago. the other potential change is that health care legislation in washington will be named for ted kennedy. senator robert byrd, his close friend from west virginia, made that suggestion. i talked to a white house official today, asked if that had been agreed to, the response no formal decision's been made. that sounds like a sweet suggestion. back to you. >> thanks very much, john. so to talk about this rewelcome back the senator from oklahoma dr. tom coburn. senator coburn, thanks for

helping us this evening. >> glad to be with you, larry. >> look, let me go to the point. there's so much talk in the media, in the drudge report, in the newspapers that obama health care reform is going to be named kennedy care. i want to ask you this, senator kennedy from the liberal and the left was nonetheless known as an effective political deal maker and compromiser. he even had compromises with former president george w. bush as you know. i don't see any evidence so far that president obama or the leaders in congress are compromising what the republicans once did, so i ask you, sir, what has changed here besides trying to somehow have democrats exploit the sympathies and affection of the passing of senator kennedy? >> well, i think the problem from the start -- senator kennedy had been in charge of the bill we passed through the senate that no republicans voted for and all the democrats voted for in terms of the committee, would have been much different bill because of the one thing

even though philosophically and politically he was a foe, he was a reasonable man who recognized for the good of the country it had to be something the majority of the country can accept and so i think had he been there we would have seen a different bill than what came out of the health, education and pension committee than what actually did. when he gave a word about changing something, he always did it. i have a significant amount of experience in dealing with it on the genetic nondiscrimination act where he actually kept his word after we passed bills and worked to make them acceptable. >> it's interesting if you go back to president bush's days, deals with senator kennedy on education and on health care, on medicaid drug prescription. whatever one thinks of those pieces of legislation, the fact is they were compromises. i want to ask you, renaming obama care, which is highlighted by the government insurance plan and radical cutbacks in medicare among its many other problems,

its taxing and spending, what changes here? why do we suddenly think the polls, which have been declining and the revolt from the town halls, why do we think that's going to change, sir? >> well, i don't think it is going to change. and the thing that concerns me more than anything is this continued view by the leadership in congress the opposition and the actual true worry and concern of the american people is contrived. i assure you i've never seen anything like this in my entire life. it is not contrived and it's not just republicans. people are genuinely worried about our future and it all stems from the fact we're in such fiscal trouble and that we're not seeing anybody do anything that makes sense like lowering spending rather than increasing spending and so the health care becomes the symptom of the underlying disease which is an out-of-control government that's spending way too much money. >> i want to come back to that important point but let me just finish up on health care because you have your own bill and

you've been through town halls down in oklahoma. wouldn't some genuine compromise include things like tax breaks for the consumers of health care rather than just a business providers or interstate competition for true insurance deregulation and a really competitive market? wouldn't those be important signals that the white house was loosening up and ready to talk? >> i think -- my hope is that when they really assess this and look at what the vast majority of americans are feeling, the concern and worry and true thoughts about the future of our country that they'll make another consideration of maybe working with us on some of the ideas. to really create a competitive health insurance industry in this country, really make sure it's transparent, both the price and the quality. to truly incentivize management of chronic disease and work to put dollars to prevention and wellness rather than towards programs that are not going to have any effect on people's

health. >> i would add to that compromise list tort reform to lower medical for product liability. your bill, as i understand it, you have tax cuts or tax credits for those people who are low income and can't afford insurance. you even have a tax break for insurance companies who accept policies for preconditions. >> yes. without preconditions and the other thing we do is we incentivize the states with more medicaid money if they'll do tort reform. >> so why -- i mean, aren't these the kind of leading indicators you'd have to see from the white house or the congress to suggest that whatever is going to be called kennedy care would be a genuine compromise and just change this whole thing? >> they have not come off their philosophical high horse. the assumption now is washington knows best and that market allocation and resources doesn't work. and the fact is we run the whole rest of the country on the fact

that competition and true markets are scarce resources well, so we can put a wonderful floor under people. make sure everybody gets covered. make sure nobody goes bankrupt or loses their home through health care and we can create a vibrant health insurance industry that has new products, long long-term products, management of chronic disease. we can do all those things. we can't do it until there's a recognition what they're doing now isn't the right way to go. >> as matters now stand given the legislation on the table of the house and senate, what is your estimate? will this thing pass or is it dead in the water? >> they have the power to pass anything they want. the problem is what is the risk if they pass anything they want? and the risk is big to them because, number one, they're saying that people are not loyal americans if they're having some concern about this bill. i think they've even been called evil mongerers. there's a big down side if they go on and push it through.

if they truly perceive the reaction to this is contrived and they really think that, then they'll push it through. >> i thought senator lieberman of connecticut as a leading indicator when he said this is simply not the time given our deficit and fiscal problems which are so enormous, this is simply not the time. i wondered if you'd comment on that plus senator feingold. you have two democrats who tend to be rather liberal on these issues. feingold also said ain't going to happen this year. are they leading indicators democrats cannot get it through? >> well, they may well be. the assumption behind those statements is we need to spend more money on health care and we spend twice as much as any other country in the world per person on health care. what we need is better value and allocation of the dollars we're spending today and so i have a little trouble -- it may not happen. they may be right as a leading

indicator but the approach is all wrong. the fact is we need to get savings out of health care and still cover everybody rather than spend more of our kids' money establishing better health care. >> just as a last thought, senator, in terms of this massive government overspending and overborrowing which has become so chronic now, i mean, the concord coalition said, you know what, the $9 trillion cbo estimate or the estimate of an increase in the debt is really too low. it's going to be $14 trillion in the next ten years when realistic policy assumptions are put in place. $14 trillion. now my question to you is, is it time for people to start thinking about the need for a constitutional limitation on spending and taxing? isn't that where we have to go? >> absolutely and you're seeing that with all the tenth amendment movements around the country. people can't get a handle around a trillion dollars. this year per family we're going to spend $22,000 more at the

federal government level than we take in. now it doesn't take many years to bankrupt all our children and our grandchildren of continuing to do that. so there's no question. the way you get out of trouble is quit doing the same thing you've been doing and that's spending money we don't have on things we don't need. >> president reagan towards the end of his second term launched an economic and fiscal bill of rights and in there he wanted these constitutional amendments to limit spending, to force a two-thirds vote on any tax hike and for a balanced budget. do you think it's time to bring that kind of economic and fiscal bill of rights back into play to deal with this incredible fiscal bankruptcy and breakdown? >> well, there's no question. i've been saying that, preaching that message for 4 1/2 years in the u.s. senate. but what's going to happen, it's going to be demanded by the state. you're going to see refuseals i

predict in the next couple of years, refuseals of states to follow federal government mandates on the constitutional grounds they don't have the right to ask us and individual states to do certain things because we're way outside the enumerated powers in much of what we're doing. >> senator coburn, thank you ever so much for your time. we appreciate it. >> god bless you, larry. >> thank you, senator. coming up on "the kudlow report" the fdic puts out its second quarter report card. more banks are going to fail. our question this evening, is your money safe? and then, two titans of wall street give us their new bull market strategies. one titan sees 6% economic growth by the end of this year. how about that? you know, the dow is up eight straight days. i don't see a lot of press coverage of this. it's up 450-some-odd points. this is like the greatest story never told. but we are going to tell it. 

all right. we have more pictures of the jfk

library in boston, massachusetts, where the body of the late senator kennedy, edward kennedy, is lying in repose. you can see the ceremony with the beautiful american flag draped over it. people are showing up. it's going to go on for quite some time and we will continue to channel some of these visuals for you to check it out. that's the kennedy library in boston is and the late senator kennedy's body in repose. now the fdic gives a dour report projecting more closures and a bigger loss in the insurance fund. so what does all of this mean for you depositors? joining us now with the details hampton pearson, cnbc and washington, d.c., hello, hampton. >> reporter: 24 banks failed in the second quarter and that problem list of banks reached a 15-year high, 416 banks in trouble with assets of just under $300 billion. fdic insured banks had a $357

billion net loss. 28.3% did not make a profit. 48.9 billion compared to 26.4 billion this time last year. noncurrent loans, more than 90 days past due are at a record level, $41.4 billion, up 14% in the second quarter. >> one of the these of today's quarterly profile, performance is, as always, a lagging indicator. the banking industry, too, can look forward to better times ahead but for now the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry's bottom line. >> now as far as the help of the fdic insurance fund itself, it declined by $2.6 billion. the second quarter with $42 billion in reserves. larry? >> all right, hampton. thank you very much.

hampton, i just want a quickie, miss bair, i'm picking up on this, seems to have a slightly optimistic spin which is slightly unusual for her. do you have a thought on that? >> reporter: well, she said that as bad as all this balance sheet red ink is, if you will, like the rest of the economy there are slow, showing signs. for instance banks are increasing their reserves to handle the loan losses but it's beginning to turn the tide and they're really doing the business of getting the balance sheets in order. but it's going to take time and, frankly, it's going to lag the recovery by a lot. >> all right, hampton pearson in washington, d.c., thank you ever so much. with more bank foreclosures looming and the fdic funds dwindling, is your money safe? all right. we're going to pursue this. let's get a quick tease from our two prominent guests. former chairman bill isaac. we have chris mair from columbia

school of business. the fund has dropped to $10 billion, the insurance fund. it was $45 billion a year ago. it is supposed to insure $4.5 trillion. is our can he deposit money safe? >> absolutely, larry. the fdic has the full faith and credit of the u.s. government behind it. there's no reason for anybody to be concerned. >> chris, are you buying into that? >> absolutely. >> no hesitation at all. you guys don't even -- mr. isaac, you ran the fdic once upon a -- you're not even hesitating. you're saying all depositors, don't fret. despite the fact there's $10 billion in insurance left, $4.5 trillion to be insured, we're okay. that's the deal? i'm going to give you one last chance on this tease. bill? >> we're okay. >> all right. chris, professor? >> we're okay. >> all right. we're going to come back and break this down. i have a couple other questions

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these bank deposits? a pretty gloomy report today. joining me to discuss the senior vice dean of economics and finance at columbia business school and bill isaac, a former fdic chairman. so, okay, bill isaac, the viewers want to hear this again. this is a great little story. let me get this right. we have $4.5 trillion in insured bank deposits. i get the ceiling is $250,000 now. the fund is $10 billion. it's down from $45 billion a year ago. so $10 billion stands behind $4.5 trillion, a whole bunch of banks are going under. you're saying we're okay? >> i am saying we're okay, larry. >> why are you saying that? >> well, let me explain a few things. first of all, the fund is not really down to $10 billion. it's still got something like

$40 billion in it. what they've done is created $30 billion or $40 billion of reserves for future losses even on banks that haven't failed yet so this is reserve accounting that takes it down to $10 billion. the money is still there. secondly, the fdic, if it should run out of money, has up to a $500 billion line of credit from the u.s. treasury. >> who is going to pay for that? who is going to pay for that? it's a small point $500 billion. it isn't like the government is sitting on surpluses of cash. i thought we were closer to being bankrupt. >> well, that's true. i would tell you, know, that the banking system as it did last time around, the banking system will stand behind all of this and if the fdic should borrow money from the treasury it will be repaid promptly with interest as it did the last time. it dipped in the early '90s and within three years that fund was restored back to $ .35%.

>> how did the fund get restored? that's an interesting point. >> well, two ways. one is the fdic always takes sesi sesive excessive reserves. the fdic had taken about $15 billion of unnecessary reserves, which is what carried the fund to negative territory. and then secondly the banks start kicking in money as they turn profitable, the fdic increases their premiums until that fund is restored. it only took three years between those two items. >> chris, premium increases on the bank. now the last time we spoke, you weren't all that optimistic about the economy. sheila bair is saying this a lagging indicator. we have a steep upward slope in treasury curve which should help banks. they borrow short of zero and no longer had a considerable net interest rate profit, et cetera, et cetera. but, regarding what bill isaac

said, can banks take this sort of tax increase you all are describing? >> can they take it? sure. is it going to take them longer to get back to normal? it will be if they have to pay more to run the fund but obviously we can't let the fdic fund go bad. >> we can't let any deposits default. that's what you're saying. that's the bottom, bottom line. we are guaranteeing that and that's the deal and it's the full faith and credit of the u.s. government as skeptical as some people are about the u.s. government. seriously. >> no, look, i share some of your concern about what the full faith in credit means but at the end of the day we -- if we were going to stand and not let aig fail, we're certainly not going to let the banks. >> let me ask you about this. we got 8,100 banks in this fund. do we need 8,100 banks in this country? we're down 8,100 or whatever the number is so far this year. but according to the report

today, 8,100 banks are part of this insurance fund. do we need 8,000 banks? why do we need that? >> i'm not sure that there is some right number of banks, but i certainly feel like smaller banks often provide valuable services and competition and serve markets that the larger banks don't serve as well. >> but aren't these little piggy banks the ones that are going down? that's what's happening here. some are bigger than others but on the whole it doesn't seem to shake the system. i'm into the banking destruction here. assuming you guys are right, and i hope you are that this stuff is going to be guaranteed and insured properly, then my next question is, so who cares? so a bank goes down, a big bank swallows her up and that's the deal. >> i agree with you. i think we let the small banks fail, we let them fail. there is a lot of research that suggests there is such a thing as a bank dependent borrower and if you have a relationship -- if you're a small business and you

have a relationship with the local bank and that bank completely disappears and isn't swallowed up, you have problems. if they're swallowed up and those relationships still remain, small businesses -- you know, it's tough to get credit. it would be worse if that stuff disappeared altogether. >> do you agree with that? can we take a shrinkage of banks? i don't know why. i want to get your take on it. when you ran it were there 15,000? 16,000? >> about 15,000. >> so we're down to 8,000. has america suffered from the loss of banks, 50% drop in banks? >> i don't think we've suffered. there's a lot of competition in banking. i would agree with chris the smaller banks play a very important role in lending money to individuals and small businesses and serving smaller communities in particular. i really would hate to see that system disappear. i don't think it will. i think we're going to lose some banks this time around. we're talking about hundreds not

thousands. in the 1980s, just to remind everybody, we had 3,000 bank and thrift failures, many times the number we're going to experience today and the problem bank report today that said there were 400 banks, i would remind everybody that at the end of 1991 after 3,000 banks had failed in the preceding decade, we still had 1,500 problem banks on the list so this 400 number is not a staggering number. >> all right. so there's a little too much pessimistic hype. now that's what sheila bair basically said, a lagging indicator and we can take it. she also said, i want to get your take on this, that in the aggregate for all these banks, the 8,100 banks, their capital levels are improving. their troubled loans are slowing and their delinquent loans are dropping. so she is actually painting a much more positive picture than the media headlines would suggest. do you buy it? >> i do believe she's painting

that picture and i believe it's an accurate picture. we have about a year or sometimes two years of cleanup after a recession comes to an end and i believe this one is coming to an end. so we'll have another year or two of problem banks and bank failures because they are lagging indicators but i believe we are moving into the cleanup phase and we will get these problems resolved and the cleanup phase is very important because we get banks out of business that can't lend money and we merge them into stronger banks that can lend money. >> that's where i was going with that. you've got to do that. you just can't keep all these piggy banks going forever. if they can't survive, you don't want the government taxpayers. one of the things i like about the story of bank failures and, again, this is my gale creator of destruction. at least we know that a bunch of banks are not too big to fail or too small to fail. at least that we have.

>> absolutely. i think what we have -- the willingness to let small banks fail is good. i am more pessimistic in the sense i think the shocks we take and the difference now vis-a-vis the last serious when bill was looking at things is the large banks, securitization, these things are not showing like they're fixing themselves so quickly and we're going to need more than just the banking system. deposits alone cannot fund the need for credit in this country. >> who is going to fund it? >> we're going to have to get securitization to return and we haven't made steps. >> no sign of that. >> we need a different road map and this is the place where we are going to need help going there. >> help from where? they want toxic assets. the fed is trying to help out in the so-called dark markets, the securitization market. is that what you're talking about? >> i want to see the private markets, the dark markets. i want to see us get a private

securitization market working again. >> do you think that's possible? >> absolutely. >> i will ask you one more time, one more chance on this question, when these small banks go under, what do you say to their depositors? what happens to their deposits the next day? >> they close on saturday and they reopen on monday and they're fine. >> and you're a professor at columbia business school and you're standing by it. >> i'm not running from my bank. >> all right, bill isaac. you win. you win tonight, mr. isaac. great to see both of you. i appreciate it. i hope that our viewers are m listening and believing. coming up later, clothing retailer j. crew out with its nd quarterly earnings report.en did it get a boost from the first lady's fashion sense? and later two heavyweight investors will share their strategies for the new bull market. this is a great story. the dow up eight straight days. if you listen to the media, everyone is talking about corrections and pullback. this is the greatest story never told. the dow is up almost 450 points in eight days.

all right. in a nation supposedly obsessed with michelle obama has retailer j. crew been the main

beneficiary? the first lady's designer of choice reported after the bell today and jane wells joins us with details. hello, jane. >> hello, larry. no matter who gets the credit, you can't argue with results as j. crew obliterated street expectations this afternoon. it reported earnings of 29 cents a share that's actually better than a year ago in this environment and nearly double the 15 cents analysts expected. now revenue grew 6% for the quarter but same store sales fell 5%. still, the revenue projected third quarter earnings will meet or beat estimates. what's the deal? fashion and price and her, michelle obama's famously worn this brand. it's just been brought more aware given the fact it is a small company and the amount of advertising that the obamas have brought to j. crew has certainly given a lift not only to the brand but to also customers who wouldn't have seen the store before.

>> exactly. and chelsea also says, larry, j. crew is gaining market share from department stores and also chains like banana republic. back to you. >> jane, go with me on this, mrs. obama, a very attractive lady. how much does she shop there? >> oh, well, i think they come to her. she does wear it a lot. i think if it you look back over the last year she wore it on her first trip abroad as first lady. the kids were wearing coats on the inauguration day. her husband wore a j. crew bow tie to the inaugural ball. it's a $52 silk bow tie. maybe a little fancier. >> we're not just talking casual knock around. j. crew is in the dressup business, right? >> well it in a kind of preppie way. what dana chelsea likes about this brand it has a very good fashion sense in her opinion at the right price point so it may be dressup but, again, as i said, bow ties are $52.

you're not talking about $5,200 like you may have seen at past inaugurations. >> you're okay with preppie brands, right? >> that's me, larry. through and through. >> you're preppie. thank you ever so much. coming up on "the kudlow report," good news from computer giant dell. another feather in the recovery hat. why are investors flocking to aig? that's another big one. aig, high risk at least until today. it was up 27%. so could it be that former ceo hank greenberg is returning at least as an adviser to the company?

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market story. tech giant dell beats the street. they actually released surprisedly just before the closing of the bell. as you can see that stock is up 9.3%. $16.04 in late trading and after hours trading. cnbc's silicon valley bureau chief joins us from the west coast with the surprising details. hello, jim. >> reporter: thanks very much, larry. indeed, a very good report tonight from dell. the company reporting 24 cents but you back out the 4 cents that were included as far as one-time expenses and the apples to apples 28 cents that beats the street by a nickel a share. the company's conference call this evening anticipates a pretty big refresh cycle as well as a powerful new product pipeline thanks to new products from intel and microsoft. he says the good times are only beginning at dell but, indeed, there is still lots of work left to be done. this is the kind of report investors were waiting for. now back to you. >> all right. jimmy, thank you very much. this could help with a big

market opening tomorrow because technology is so key to this rally. now another gigantic stock market story, aig stock got a huge bump today off rumors that hank greenberg is back in the game. the latest dash to trash as some investors have been putting big money into these very big risk names. here with the full report on wall street's so-called risky business is our very own bob pisani. hello, bob. >> reporter: financial stocks leading the market off the bond. let's take a look at four of the big names. aig moving for a second day in a row as ceo acknowledged he was talking to the form er ceo hank greenberg. maybe there might be some role for him in the future. citigroup moving over 1 billion shares changing hands there. hedge fund manager paulson reportedly buying citi shares recently. altogether, larry, these four companies accounted for 2

billion shares changing hands. they're about 20% of the volume of the new york stock exchange. just four companies. back to you. >> all right. thanks, robert. i think it's a great story for risk taking. i, myself, followed up on this story, the aig story, that is. i spoke to senior sources very close, very close to mr. hank greenberg, the former ceo of aig who, of course, was the great creator of this company. and as these sources reported to me, what mr. greenberg is saying to the current ceo is quite simply this. ignore the government strategy of liquidating their major businesses. just ignore it. instead, do not sell the assets. what's more, build up the assets, particularly the global, life, and property insurance companies and the global and domestic commercial real estate companies as well. they're in good shape. they will turn profits and they will move in a worldwide basis. in fact, these sources told me

that mr. greenberg is telling them even the airline leasing company which has had its difficulties can, in fact, be worked out. now the financial products company, the source of all the derivatives, that's going to be run off. there's no question there. however, aig has a $70 billion tax credit that can be used as another profitable weapon and, in fact, according to these sources who were close to mr. greenberg, greenberg is telling them you can work through this. you want to build the company back up, it has great profit potential and the american taxpayer is, in fact, going to be paid off just as shareholders are going to be rewarded. and i'll say this, if, in fact, he listens to the great hank greenberg, one of the greatest businessmen in this generation in this country, that will be a welcome change because it was former new york state attorney general eliot spitzer with his phony charges that forced

greenberg out in the first place with despicable actions that turned out not to be true. if greenberg had been running this thing in the last three, four, five years, i'll bet you it would have been a better story. the fact the new ceo, if he's going to use hank greenberg as an adviser, not even operating but as an adviser, this is a good thing for aig. that's what shareholders are sniffing out. that's what investors are sniffing out, and i think this is a turn for the good because it is a great inbe shurns company. all right. moving ahead, coming up, investment strategies from two of wall street's biggest titans.

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let's do some more work on stocks. we have another leg to the summer rally. eight straight days of rising dow. 445 points. nobody is writing about it. i'm talking about it. it could be the greatest story never told. does the market still have plenty of room to run? joining me two of the world's biggest investment titans. our great friend ken hebner of capital growth management and steve ott, global cia of equities at federated investors which has a cool $400 billion in

assets under management. how are you feeling about things? >> i think the economy is going to surprise on the upside. i think we're going to see a considerable recovery both in magnitude and in time. i think the global surplus of labor means we can grow for a number of years without any inflation and this is an ideal stock market environment. we are producing well below the level we're consuming and though the consumption rate is depressed so the first thing because we brought inventories down to rock bottom level in the economy. the first thing that's going to happen is production will rise to the level of consumption and that sko be quite sharp. then consumer confidence is going to rise and consumer spending is going to rise. so you could have a sharp v recovery here and very rapid expansion in profit margins with productivity in the cycle, in this recession, has been particularly strong. >> by the way, speaking of profits, that's an important

point. i bring steve in. profits really are the mother's milk of stocks and the whole economy. we had a good report today, revisions in gdp second quarter. it's really about 5 million companies after tax profits up 25% from the fourth quarter. now for those who are doubters, my good friend douglas katz, a very smart guy, one of the people who called the march turn, he's saying the economy is going to sputter. what's your take? >> no way it's going to sputter. i've got actually 6% growth in the fourth quarter. >> 6%? >> yes. it's like five different things i can think of. there's a lot more. the weight of history, larry. and you said this in the past. the economy is a natural organism. it has a natural growth past. one of the highest correlations is the amount of the decline is very similar to the amount of the rise. we've had one of the sharpest declines in history. we will bounce back fast. the inventory rebound is huge. if you look at autos we were

consuming 15 million autos a year, producing at that level. we've dropped consumption to 10 million. crushed. where has production gone? >> even without cash for clunkers. they're still going to buy and produce cars? >> but production has gone to 5 million. to get back to the 10 million you have to double auto production and now the cash for clunkers has sold out the cars that were parked all over michigan. you've got the housing secotor which was the beginning of this mess. it is now in the last two or three weeks you've seen the data it's clearly bottom. >> so both of you gentlemen are optimistic about the economy. you are really optimistic but, ken, you sound positive. ken heebner, we have talked several times about this period of market recovery. are you as bullish on stocks, let's say, today as you might have been, let's say at the beginning of this summer rally in july? >> well, i mean, the market's up 60% so i don't think in the next

three months the market is going to go up 60% so the market to some extent reflects the very favorable outlook we're talking about. >> are you selling into -- you're right. 60% or 50% plus. you had gone on top of that almost 20% in the summer rally. are you still buying? are you still adding to your positions, ken? >> absolutely. i think the big banks are up. they have a lot of room to go from here. they're going to move toward the period when they can reduce their provisions for bad loans. i think in the case of the automobile industry, getting back to the point that we've been underproducing, there's not enough cars. and in the month of july on ford, the incentives were down by about $5,500 a car to $3,500. and i think in the month of august they're going lower. you can see a multibillion-dollar swing just in realization for ford motor just on the basis of the better

pricing. and no one's talking about the fact there's been a dramatic improvement in the pricing in the automobile industry in the last couple of months and it's going to stay there for a while because we have inventories vastly depleted. a dramatic increase in margins, you can see ford at a rate of $2 a share suddenly if the expansion and profits is great enough. >> you've also this year in this market rally since early march talked about commodities in energy. what's your thinking now? >> certain commodities are going to go into shortage. coal and copper will be in that category. oil is tough to figure because we have a surplus of oil even though opec has cut production. iraq is a big wild card. the country wants to produce. they can bring on 3 million to 6 million barrels a day. whether they can or not is what happens politically in the region. it's hard to know. so i don't know about oil.

>> steve, let me ask you that, to challenge, we don't see any substantial job creation. we're probably going to lose another 250,000 jobs in the report next week. the unemployment claims came in today. we're muddling around 550,000. a lot of smart people think we should get that down to 400,000 or lower and, therefore, they're saying there is no sustainability. maybe the third quarter goes up for the inventory reasons you describe and ken describe. how do you respond to those critics that say there's just no jobs and, hence, income and consumer power? >> the same businesses, larry, faced with the end of the world back in january/february that slashed their production to save their companies also slashed employment much deeper than they needed to for the current environment. so just as we're going to see you don't double auto production and not hire workers. the jobs numbers are going to surprise on the upside. we've been expecting that. i thought it would have happen in june. it didn't.

the june number wasn't that good. july did surprise on the upside. >> when do you see the first -- >> i think one handle on next friday's numbers. >> we have to have positives, real positives. >> we've gone from 500 to 400 to 300 to 200, 100. >> what's your favorite investment? >> later stage cyclicals here. we would move into the later stage cyclicals, materials, industrials. i still like emerging markets. >> two optimists. i like it very much. the dow keeps rising. the s&p keeps rising. nobody wants to talk about it. ken heebner, thank you for coming back on. steve auth the same. catch me tomorrow morning on "the call" at 11:00 a.m. we will leave you with a live view of the kennedy library where senator mccain will address the group tomorrow. announcer: what's your cialis moment?

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