Transcripts For CNBC Squawk Box 20100105

good morning. a strong start, the bulls charge out of the gate as a new year of trading begins. food fight, kraft, necessarily, hershey, fer rare ra, who wants cadbury the most? and what does pizza have to do with this story? the markets at this hour, green arrows across europe and asia. overnight, u.s. equities are mixed as "squawk box" begins right now. good morning and welcome to "squawk box" here on cnbc. i'm becky quick along with joe kernen and carl quintanilla. topping today's squawk stories, kraft sells its pizza business and ups its offer for cadbury. the nation's car members released december sales. apple prepares to announce a new tablet device later this month and house democrats try to get a health care bill to the president's desk within weeks. >> that's right. kraft sweetening the cash portion of its offer from kaud bury. the business includes brands like tomb season, digorno. necessarily says it has no plans to bid for cadbury, but her shoe and ferraro are not entirely out of the race. cadbury has rejected the new bid, saying it doesn't offer any more value. that's why it's getting a little more interesting over the past couple of days. >> people still eat frozen pizza, is that true? >> yeah. >> they must make the california pizza kitchen for the restaurant chain. that might be okay. automakers are expected to report today. a reuters survey of analysts suggest that u.s. sales on oofrg are likely to come in at an adjusted 11 million unit rate which is probably better than people thought. and that was the story yesterday, that maybe the long slump in auto sales is over. >> so the expectation on friday that you'll see a positive jobs number. >> great day yesterday. great day. first, as the first day of the first week goes, sometimes the week goes like the first day, but last year i guess it didn't. and the really scary year it did. or maybe it was 2008. but the first gaye day was great. >> as it was last year. >> was it? yeah. 20308 was the one where everything started. >> yeah. >> but if the weekends, you know, my 1250 target end of the first quarter. >> you got a little closer yesterday. >> did you see oil? >> up nine straight. >> but it's cold. >> it is. not just in the u.s., either. it's europe, it's asia. >> how long does the weather have to stay much colder than normal to have the year come in way lower than expected. because this is not supposed to happen. none of the models have predicted what's happened in the last couple of years. and, you know, whenever you hear in history, the warmer year in history, it's like since 17850. >> i don't know. we'll know for sure. >> we will, one day. >> i may not live that -- >> one bad day. >> who was that, brusque ka, i want to live well and eat well because i want to see that entire thing fall by the wayside. >>. >> google is expected to unveil its smart phone today. details of this device have been leaking out through blogs and media reports now. some of the earlier reviews describe the device as not drastically different from the existing smart phones that feature the android software. shares of google up 70% over the last month. >> the wall street journal says apple is expected to announce that new tablet device later this month. some say it could be the country' biggest launch since the iphone. they plan to launch a 10 inch to 11 inch tablet by march. shares of apple rising to a new closing high yesterday as they've been doing lately. >> that's what i read. i read that last night, carl, and felt like i had a much better handle. people do like to go left to right instead of rolling down. it's uncomfortable to do that. but it would have 3d graphics. >> color, we think. >> yeah. and different colors. it would make reading a book or a magazine just as good as having it right there and it would do for publishing what the -- what is this thing, where you buy the music -- >> i tunes? >> yeah. it would itunes-ify the music industry. >> have it would be hard to make it for any less than that. are you saying you'd get one? >> no, no. >> what does it compete with, the kindle? >> yes. >> although the kindle is mow know chrome attic and smaller. >> yeah. but navy, the president today is meeting with intelligence chief and other top security officials to review what happened with that attempted bombing of the airliner on christmas. following the meeting, the pp president is going to make another statement. he'll join us at 8:40 eastern. >> also, house speaker nancy pelosi will meet with congress and try and map out her strategy for getting a bill to president obama's desk. they want legislation passed before the state of the union address. there are significant differe e differences between the bills passed by the house and the senate. those differences have to get ironed out before anything can get done. among the biggest items there, aboard funding restrictions and whether or not to include a new government-run health insurance program. those are substantial differences. >> yeah. we're not quite done talking about that story yet. oil prices nearing $82 a barrel overnight. analysts are pointing to the cold spell we've had overnight. >> how about every year, like, forget it, you're going to pay us more or we're going to shut you off in the dead of winter? >> yeah. in t in the meantime, the energy department says the national price of regular unleaded gasoline is up, about 2 $2797. >> let's get a look at what we can expect to see today. the national association of raelt realtors are releasing pending home sales for november. people thought mortgage rebates or the mortgage discount you could get for taxes wassing goal to be brought to an end. but at the same time, you'll see a lot of sales coming in for november. economists are looking for a modest gain for them number. >> we mentioned what a nice start we have for the markets this year. it will be tough to follow that up. europe has been stubbornly flat today. we talked to an oil already. futures here, the yield at 3813% as we see more risk appetite for risk especially when it comes to the dollar. the dollar is a little weaker across the board. 1.4411 euro now. 91.98 yen. and in gold, i think we'll see goldman boosting their target for gold for the year. >> really? >> $1350 for the year, something like that. let's get overseas and see what's happened around the globe. first, to london to check in with geoff cutmore. >> good morning to you, carl. we're sort of treading water across the european markets. we're higher on the london exchange. some on that is to do with the uk banking stocks. cadbury remains the biggest story for us in our part of the world and that news that kraft is putting 60 cash on the table here, the total $16 billion bid not changed, but there is an increased cash element as a result of kraft foods selling on this pizza business to nestle for $3.7 billion. that gives them a little by more leeway. the other, next they have said that they are not going to enter the bidding battle for cadbury at this stage. the market, of course, would like to see another bid and another price here. let's send it over to asia for an update on that market. >> geoff, investors are feeling more confident about the global economy. in gentlemjapan, the surge in m prices like copper gave resource shares a boost there. now, the strength in commodity prices helped to lift mining and energy stocks, as well, in australia with a bunch mark index up. ebb investors are betting that as the commodity improves, and over in china, the shanghai gaining 1.2%. brokerages jumped saying security regulators might launch its first stock index futures in the first quarter. so that is a quick look at asia, sending it back to you. >> christine tan, thank you for that. let's see how the u.s. markets are shaping up so far this morning. beth ann lavino senior economist from standard and the poors and mark harris, good morning to you both. >> the times this morning called this a great ambiguity. are you putting a lot of faith in the numbers we're getting? >> well, i mean, one number certainly doesn't make a trend. but when you start to see several numbers and they start to build up, we are looking at -- we think manufacturing is starting to bottom out. the sector does seem to show there are signs of stabilization. the ism, you take to that the new york fed numbers and, of course, also the chicago pmi numbers, you do start to see some improvement. i mean, the ism, we thought it was strong pretty much across the board and that does suggest that it's looking to be a good number going forward. we think the factory numbers are going to look relatively positive, as well. >> yeah. mark, do you agree with that? and does all of that -- is all of that helpful without jobs? do you need to confirm it all with the above number on friday? >> with the, we've been saying for a while, we can get there and we can have this economy going through third quarter without having to have what we would view as the alignment of a recovery. a lot more jobs, a lot more things. but we need to start to see that. let's call it the end of the second quarter. if we don't see a recovery, i think we're going to have more of a problem on our hands. the growth companies will be led to the point of our prior speaker here, great ism numbers, great gdp numbers. we're seeing that frankly in the reaction of the markets in the first day or two. >> yeah. i was looking through some of your best ideas for 2010 and names that people would not have been buying in bulk, you know, nine, harley for one, b of a, and i know you've got metals, as well. so when you talk about growth, you're talking about -- is that a more reservend consumer who is willing to go out and buy a hog again? >> i would call it, instead, procyclical. i think in particular, the first two quarter of this year are about buying technology names, it's about going consumer names. it is going to be about buying things that in essence i would argue have the ability to comp year on year. looking back and saying to ourselves, gee, this growth number, it's going to look pretty good when you compare it to where we were last year. a lot of things have already sort of cycled, so it's easy comps. but there are still a lot of names that aren't optically on those numbers are going to look great. some of the names you mentioned fit that bill. but you buy a koogel today, you've got all this optionlty that frankly isn't built into the numbers, on news today, on their mobile numbers and things. >> beth ann, your thoughts on that. we just got done talking about the apple story. there is an example of at least one company heavy into innovation that expects you a ostensibly to be met with real fine demand, right? >> what we're thinking about with the economy, we think that we -- while we do think that growth is going to certainly 2010 is going to look better than 2009, but we're not expecting a v recovery. we're looking at something more like a layzy u. so we're going to see growth, we're going to see something that's around 2%, certainly below trend, but a lot better than what we had before. and we think the areas that we're going to see the consumer maybe starting to basically buy some more of those products for their house holds because it looks like housing is stabilizing. that is one good thing in the economy. we don't think the jobs numbers are coming back quickly. we think the barrels are start to go show signs that we might start to see a positive number in the next -- maybe not this week, but certainly the next month. but we are expecting unemployment to continue to climb. >> so are you looking for a positive number friday, or not? >> no. we're looking at pretty much a low -- basically, we're looking at a slight negative. it could be positive based on the senus that's coming out, that government is going to be hiring a lot more, not even tied to the stimulus package. >> how about you, mark? if it's not positive this week, are you looking for, by the time we get into the spring months, are we going to be looking, perhaps, at 100 plus? >> well, we'll see. certainly i think more you have to think about this year in general and that back half of the year as a point in time where you're going to start to move from these procyclical names into the defensive names. by that point, ism will be roaring along. i think it will be over the normal range of standard deviation and i think it will be time to begin to scale back. i think this year, it's a lot more about buying quality, buying defensive as we move into the back half of the year. buy names that you know and you like and you think have a good fundamental business. a lot of that will be energy of the economic numbers which are going to have to recovery by the back half, but i think there will be patience in the higher quality name. people understand the recovery isn't in a straight line. it can move in fits and starts. and i think the market or at least the better quality names will be patient with that. >> it will be interesting to see if the year is that clooer cleanly broken in half. appreciate your insight, both of you. >> if your alarm clock is just going off this morning, we're got good news for you. we'll be bringing you up to speed on the morning's headline. plus we'll take the markets from the futures pits in chicago. as we head to break, let's take a look at yesterday's winners & losers. would you like a pony ? 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( cluck, cluck, cluck ) oh, wowww ! that's fun ! you didn't say i could have a real one. well, you didn't ask. even kids know when it's wrong to hold out on somebody. why don't banks ? we're ally, a new bank that alerts you when your money could be working harder and earning more. it's just the right thing to do. welcome back b everybody. check out the futures at this hour. you will see that they are just below fair value. this comes after a morning of very strong gains or after a day of very strong gains yesterday where you saw the markets up but better than 1.5%. flickster is buying movie review aggregator roton tomato hes from a unit of newscorp. also, the nfl and the players union will tackle a number of big issues today. the players' association has presented a proposal that would include redirecting money paid to rookies into the veteran' contract instead. right now, let's check in with our friend, scott williams, over at the weather channel. good morning, scott. >> good morning, becky. we continue to find the cold air over about two-thirds of the nation. look at the temperatures right now around st. louis. in the single digits, 4 degrees. atlanta, 19. 45 in south florida around miami, and wake up to 211 degrees as we move into the big apple. so it is cold. so just prepare yourself when you head out the door. we'll find more lake-effect snow interior sections of the northeast around the great lakes. as we move into the high plains, advisories and warnings have been in those areas. we'll be keeping tabs on some of the major hubs, as well. expecting moderate delays around cleveland, buffalo as we move into cincinnati and minor delays around denver. look at the temperatures as we move into denver. a high of 28 degrees. a chance for snow comes into play as we move into friday. case and point here, as we move into the atlanta area by thursday and friday, we'll see a chance for some snow. so temperatures running well below average over the next several days across the nation from where they should be for this time of year. somewhere that you see blue here as we approach the coming days, the latter part of the week, even colder air. so we're talking about a 20 to 30 degrees below the average as we move into the latter part of the week for at least two-third of the nation. it looks like we'll see higher energy bills, indeed. >> and some of that cold weather is affecting, scott -- so cold. did you look at the usa today chart? they're going to get snow in places that have never seen snow. let's start with biogen idek, upgraded to neutral from underperform at bank of america. ubs is talking about the retirement of james mullin. he is 51 years old. and carl ikahn tried to have the company sold a couple of years ago. a lot of this has to do with tysabrik, the m.s. drug it tried to develop and some of the problems the company has had with that drug. the reason ubs is making positive comments is that if mr. mullen were to leave, that it would increase the speculation on a possible sale of the company. it's a 15.5 billion biotech company. elsewhere, a couple of these high flyer fertilizer stocks being mentioned by credit suisse, talking about potash upgraded to outperform from neutral. target has increased to 135 from 119. and then intrepid potash was upgraded to neutral from underperform. finally, radio shock upgraded from neutral to buy and added to the conviction list. the target increased to 21. they're rebranding this a little bit. i didn't know what they were talking about on the radio. have you heard it? got to go to the shack. have you heard it? >> yeah. >> i thought that was brian shactman. when i say the shac, i'm talking about brian shactman. but around here, it doesn't mean radio shack, does it? >> no. brian shactman is shac. >> is rebranding it to schac better to you? >> i think they want it to sound more up to day. >> radio sounds a little analog. we're in a digital world. >> so they've got to move with the times. >> but the word shack, who wants to hang out in a shack? it's like sun glass hut. >> exactly. if things go bad, you end up in a shack, right? and we've had some rough times recently. a lot of people who got foreclosed end up in a shack. i don't know. >> they clearly thought it was a good idea. when we come back, we'll get the top stories and check out with our friend kevin ferry. guys, start the year off right! lose weight and "jumpstart" your year. any guy any age can do this. introducing the all-new jumpstart kit from nutrisystem. i'm dan marino, and i lost 22 pounds with nutrisystem. that's me 32 pounds ago. i feel like i'm 10 years younger. order now and get the jumpstart kit, specially designed to put you on the fast track to awesome weight loss. i did go...all...the...way! i lost 50 pounds with nutrisystem for men. nutrisystem is based on the proven science of the glycemic index that helps you feel fuller longer. for about $12 a day, you'll get 28 days of fantastic meals. fifty years old and back to my playing weight. order now and you can get two weeks of meals free, plus, the all-new jumpstart kit, our secrets to put you on the fast track to ultimate weight loss, based on more than 35 years of proven science. jumpstart your weight loss with nutrisystem. order now and jumpstart your year. call or click now. ♪ >> good morning and welcome back to "squawk box" here on cnbc. i'm joe kernen along with becky quick and carl quintanilla. here are some of the stories we're watching. kraft foods is sweetening the cash portion of that offer pore cadbury. it's using the proceeds from a deal to sell its pizza business. north mesh pizza business, the unit no nestle. if you're wondering, it includes digiorno, tombstone, california pizza kitchen. so i guess they tried to make it clear to what you would get in a cpk restaurant. do they do that wolfgang stuff, too? >> yeah. >> also jack's and delisio. waffle actually, the wolfgang barbecue chicken is similar to the -- that's a good item. have you had that? >> no. >> barbecue chicken pizza? >> i have had that, but not the puck's stuff. good? >> not bad. >> you'd be surprised. you're thinking of the old stuff from the '80s. >> really? >> yeah. >> the crust is always like a cracker. no, no, now they have those -- what if you make your own? >> you'd be surprised by it. >> dow this? >> yeah. >> you've never made it in here for everybody. >> no. i've never brought it in. i'll whip up one of my specialties for you and bring it in. >> all right. >> hershey and ferraro, they are still not entirely out of the race for cadbury. they have until january 31st to come up with a full offer. cadbury for its part has rejected the new bid saying it doesn't offer any other value. >> you will see cadbury shares are already under pressure because of the idea that nestle is out of the -- >> i like the outcome that -- alcon is an american company and they convinced -- >> novartis -- >> and they sell water for 6 bucks a bottle, right? >> yeah. but it's really clean water. you can put it in your eye. >> and you know what happens when you don't put -- >> i know, i know, but this is water and it sells for about 100 times as much as oil sells for. >> and when it's not clean, you get -- those are serious, serious eye effects. >> and the company is worth $40 billion because they figured out a way to get you to pay $6 -- >> i would have agreed with you until that bausch & lomb. that made a believer out of this girl. >> what would your saline solution look like? would you literally -- >> i can show you. i can show you. i've got some. no, that doesn't work. that's bad but, you know, it is amazing that this was a $40 billion company. i've seen the outcome and i look at what it's worth. and if you buy wall green private label, it's a third of what it costs for water. >> i used to agree with you and now, man, i am a believer. >> for the guy who buys premium gasoline for the 9/11, right? >> i do. >> carlie's car. >> but i pay the same amount as -- you know, it's leased, but i leaf lease one every four years, which is the way to go. you get a different color, right? back under warranty, why would you ever -- and i've told you that, that if you wreck it, you can't sell it if you bent the frame, you can always turn it back in as a lease. if it's an expensive car, you should lease it. >> right. got tech news this morning, google is 0.expected to unveil it's highly motivated smart phone. details have been leaking out in media reports and blogs now. early reviews call the device not hugely different. they set a 52-week high yesterday. >> let's get to the futures pits right now. kevin ferry is standing by at the cme. kevin, yesterday we got a huge jump start to the very first trading day of the year. what did you make of this action? >> good morning, beck. i think it was key that the market came right back into the risk trade and the new year started to look a lot like the old year real fast. one important difference on the first day was that -- for the first time since the month of december, the interest rate market stabilized so that the speech from bernanke on sunday night, especially the speech from kohn at the same time, both led to much more improved tone in the interest rate market. >> why? >> that they were going to have a steady hand. well, i think the market is trying to get out in front of the fed. and the one take away that we took from both speeches was guidance will be an important metric for the fed going forward. that is as the markets start to move, i look for more of a choppy trade up and down and then corrections. the fed is going to use their guidance and their statements and their speeches to help move the market or keep the market on track to where they think their forecast is. >> so the fed is really important. fortunately today our guest host starting at 7:00 eernl time is mark olson. he's a former federal reserve board governor. >> great. >> what kind of questions should we be asking him sfp. >> one of the things that they're going to have to address is that they're in unchartered territory, too. last year, if you had a strategy or belief you could stick to, you could see a massive trend in the market. exiting will be a much more delicate type of situation. so i think i would be interested to know what kind of guide posts they're going to use to steer them out of this. by their own admission, they're in a phase of the cycle that is delicate and the part of the cycle that we don't have any real historical experience with. >> and from a market perspective, what are the types of changes you're looking for, the guide post for the fed itself in terms of the language that they're putting out, in terms of the speeches? what are you watching most carefully? >> right. i think what you saw in december was the markets are going to push higher into the orbit and before the fed either gets uncomfortable with it and says we think you've got too far, or the converse, which could happen in the second half of the year, which is the fed justifying and saying we're moving rates because the market says we should. and so those are the type of things that are going to be much more important not just in the first part of 2010, but certainly in the second half of the year. so i -- you know, i think on a general sense, you've got good numbers, you've got people rerisking their portfolios. those are the good things to focus on. i think the nuance that we would say is that it's going to be a much more trickier endeavor than just jumping on one side of a long, long trend trade. >> kev, it's great to talk to you. thank you. >> okay. >> we'll see you soon. comments or questions this morning, we invite you to send us an e-mail. when we come back, he has plenty of in the market game. 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[ tires screech ] bringing you the first and only wireless 4g network, as well as the most impressive lineup of phones. sprint. the now network. deaf, hard-of-hearing and people with speech disabilities access www.sprintrelay.com. welcome back. despite good numbers in markets around asia overnight, but for the time being, we're going to have -- it's going to be a tougher sledding adding to the gains we had yesterday. although joe mentions we are now pop by 0.04 of a point on the dow. making home prices this morning falling between 10 mers and 15% in the fourth quarter. but several says the market yourndown pushed buyers into the markets. nintendo is announcing that nintendo wii sales hit a record in december. >> aim part of the trend! >> you are part of the trend. the company says ds sales hit a record high last year. >> that is archery. >> you play that right there. >> yeah. >> and you're good at it. >> yes. >> the bowling thing, not so good. >> no. how did you know that? >> you told us yesterday. >> but you stay up late after the girls go to bed to practice. >> wii fitness, things like that. it's amazing. the whole thing, it's incredible, the slightest thing you do. it's incredible, you know, what it can pick up. you know, it can tell you -- it can tell you what kind of shape you're in, how old you are. >> what? the wii fitness? >> yeah. you can monitor how you're doing. and you have the body of a -- it's not good. it's not a positive. >> i don't know if i want that now. >> no, i don't know if you do, either, really. >> that's hard. >> let's get a check into the world of business. monica novotny is here with a roundup of the headlines. >> good morning. allow me to save you from that conversation. we've got serious news here, folks. authorities say a 66-year-old man who opened fire at a los angeles krout courthouse monday wab upset over losing a lawsuit about his social security benefits. he killed a security guard and wounded a u.s. marshall before he was killed. federal regulators are threatening to shut down the kitchen of usg sky chefs after finding live and dead roaches and bacteria in that kitchen. the indicators company serves delta, american airlines and they say they've cleaned up that facility and they will pass the next inspection. we hope so. and a chicago man has set a new guinness world record. he's doing it right there, not moving. he won the annual couch potato contest for 72 hours without sleeping. he left his chair once every eight hours to go to the rest room. folks, this guy calls that a world record. my husband calls that a weekend. >> three-day weekend. >> yeah. is that really a world record? i don't know. he sits and watches tv. he gets to get up and go to the rest room. >> he could be more creative with the rest room use, too. do you really need to -- you know, eight hours. >> you know what the best part is? his girlfriend says he's very driven in everything he does. it's all about determination, they say. >> he's got her fooled. all right, monica, thank you. i know i would be a coach potato. if she would to get her own show from like 10:00 to 12:00 in the morning, i would watch that. >> what were you calling it? >> novotny in the morning. >> i wouldn't even go to the bathroom. wait until the show is over. >> you guys are terrible. our next guest says the investment climate should continue to improve in 2010. joining us now, jim mcclaughn. he manages 12 of the 25 largest pension funds in the u.s. we love to have you in, jim. thanks for joining us this morning. >> that is where you say thank you. >> listen. looking over your stuff, i think i see the logic in what you're saying. perhaps this carry trade, which was evident again yesterday and it's weird to start the new year with something we thought was maybe winding down a little i as the dollar strengthened, but do you think that that potentially will happen with commodities, that maybe they're too far ahead, but that doesn't mean equities will not perform because long-term people are finally coming in? >> i think that's the point. i think there are some natural long-term buyers of equities who are in the market and are going to take over from the carry trade as the carry trade unwinds. that is not necessarily so in the case of commodities where many commodities have been bought out by the carry trade and by expect ages of growth which are probably not going be fulfilled. so i would be very wary of oil, metal, even gold. i think those are quite dangerous in a way equities were not. >> i think a lot of people would say that if all were going to have in 2010 is that same trade from 2009, that that is long in the tooth and that is not enough to sustain us. so you think that the baton could be passed from that to longer term, just ekd investment. >> yeah. and i think part of the clue here is that the economic data is as surprising as on the up side. jobs, manufacturing, those kind of data have all -- and it's not about any one piece of data. it's about the general, overall toll that arises from a series of data and the surprises have been basically positive. which to me means that the visibility of the recovery is becoming greater. get into the first, second quarter of this year and investors will be looking at the earnings in 2011. they'll be looking forward. and with greater visibility for the recovery, that's going be another good year for profits. we've seen an enormous downturn. we saw the biggest downturn in economic activity ever in the fourth quarter of 2008. it takes a long time to recover from that. there's a good two or three years from inventory based business cycle recovery there and that is a tailwind for equities and a very good background for equities. >> so somewhere between 10% and 20% is possible in your view. >> yeah. mind you, we got 1.5% yesterday. >> do you have, by the calendar, do you have a feeling whit will happen or it will just be uneven? >> i think it will be uneven. i think it's -- you know, it's pretty dangerous, actually, to make predictions even about one year. >> yes. >> i think the real key issue here is don't lose faith in american business, don't lose faith in equities. and i actually suspect with what we've been talking about, the carry trade unwinding, something we haven't talked about which is the improvement in the u.s. trade balance, which is good for the dollar, i suspect that the recent modest recovery in the dollar could be sustained. i think america is a good place to be investing and i think there will be more in emerging markets than there is in u.s. equities. i hear the expression, that the easy money has been made, with the quick recovery from the precipice that has happened. i think the u.s. is probably as good as anything, just given the things that can go wrong in some other parts of the world. >> jim, you make a fair point about how hard it is to declare what's going to happen in one year. but over the last decade in the u.s. stock markets, you've seen zero gains. when you have clients that are big pension managers and stuff, can you tell them over the next decade that things are going to be better? >> things should be much better. the starting point a year ago was pretty elevated. that would be one point. the other point i'd make is there's a lot of talk about the lost decade. but people who were disciplined and rebalanced their portfolios kept putting money into equities when people were fearful. you know, exploited the debt in 2002, '3. bought a year ago instead of selling. so disciplined rebalancing worked. it wasn't a lost decade if people were prepared to rebalance and buy from the fearful, which actually is a very sound approach. and i think one of the lessons of the last decade is to keep going with disciplined rebalancing, buy on setbacks and don't lose faith in the ultimate direction of capitalist business because that is a system that works. >> mercer has a study out this morning saying that 80% of pension funds are vested as opposed to 70% a year ago. should americans feel better about that? >> they should feel somewhat better.it's fought a total given because one of the areas where there is still a funding pressure is public factor pensions. so public sector employees may have some concerns over the very long-term. will taxpayers be prepared to -- will taxpayers politically be prepared to pick up the tab for the deficits there? i think, those, that as we move forward, we will be moving away in the sort of collective -- joe will like this comment -- but we're moving away from the comment of the pension funds much more to defined contributions where people will be self-reliant. >> be self high reliant -- >> what? >> what a thought. not a ward of the state. gee, i don't want to live if a place like that. no, no, no, help me. take care of me. >> the year of self-reliance. >> for people who have put in the years, the decades, working for a public pension fund, you can feel better like in the mercer study or cramer, who will join us, most of these public pension funds are funded at 60%, not 85%, based on some of these numbers. how concerned should people who are relying on those public pensions be? >> they should be somewhat concerned that at some point in the next decade or two the taxpayer may be less willing to pay up. that would be the long-term concern. near term that's not really a concern because it's going to -- i mean, the momentum is there to keep funding the deficits. >> jim, with $215 you invest, obviously it's not all equity requests, if the commodities are extended, will the back up in interest rates not as bad as you thought? would you still buy bond? >> i don't think i'd buy treasury bonds right now. i think there will be a back up. short rates are going to stay low for a while. if you're trying -- >> it would help if commoditie commodities -- >> it may be paradoxical, but if you had $100 million to deposit, you would probably find it pretty difficult to find someone to take it. banks don't want dmofts, which means short rates will stay low if there's too much liquidity in the system. >> well, i don't have $100 million. >> you have half that. >> not lyra, not pesos. >> yen? >> short rates should stay low and there's a great steepness in the yield curve. >> good to see you. $215 billion. >> that's a lot. >> that's a lot. adds up. after a while. >> after a while. coming up, we will have more of today's headlines lighting up the "squawk" news wire. we have you covered from top to bottom. later, barney frank, we'll talk regulatory reform, the power of the fed overhauling health care. these are the issues that mean the most to your money. we've got a "squawk" roll call. calling chase sapphire, seeing if we have enough points to stay longer. now? 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i lost 22 pounds, and i've kept it off for three years. get back in the game in 2010. order now and you can get two weeks of meals free, plus the all-new nutrisystem jumpstart kit, our secrets to ultimate weight loss. hey, you guys. boomer. well, thanks to you guys, i did go all the way. whoop, 50 pounds lighter. so, coach, how is the squad looking? best ever. you know, i have a real hall-of-famer at the helm. l.t.?! why not, danny boy? i lost 35 pounds on nutrisystem. l.t. and cheerleaders: pizzas, pastas, burgers, meat! come on, guy food is all you'll eat! four out of five men say nutrisystem satisfies their hunger. start your year off right. order now and you can get two weeks of meals free, plus the all-new nutrisystem jumpstart kit. call or click today. coming. we will have more of the morning's top stories. plus we have prudential financial's 2010 market outlook, first on cnbc, coming from ed keon. also mark olson. "squawk box" will be right back. charles needs those contracts tomorrow morning. we should send them overnight with fedex. i already sent them. i didn't use fedex. better cross your fingers. [ man ] oh, yeah, the accident. well, you better knock on wood. remember, we did a green renovation in here, there's no wood. but russ bought a rabbit's foot. it's a bear claw. you could throw salt over your shoulder. actually, that's a salt substitute. but you should find dan -- i think he's a leprechaun. what is it about me that says leprechaun? can someone tell me please, someone? you should have used fedex. [ male announcer ] we understand. you need reliable overnight shipping. fedex. (announcer) we're in the energy business. but we're also in the showing-kids- new-worlds business. and the startup-capital- for-barbers business. and the this-won't- hurt-a-bit business. because we don't just work here. we live here. these are our families. and our neighbors. and by changing lives we're in more than the energy business we're in the human energy business. chevron. the new trading decade starting on of with a bang. stocks take off, oil surges and gold gets some shine back. >> but will it all be fireworks for the new year? we're going to take a look at whether the 2010 investing climate will be hot or a deep freeze. states in crisis, the credit crunch, the road to recovery. we have a strategy session to help investors tackle the challenges of 2010. "squawk box" begins right now. good morning and welcome to "squawk box" here on cnbc. i'm joe kernen along with becky quick and carl quintanilla. let's look at today's rundown. karm of new jersey state investment council will give us a fresh list of states that are in crisis. at 7:30 eastern former federal housing director jim lockhart, now at a pe form with w.l. ross and company. he can speak freely now. we'll find out -- >> and he is. >> also, the big chill, a travel forecast from the weather channel. and our guest host, former fed governor and co-chairman of corporate risk advisers is mark olson. we welcome him. great to see you. >> thank you. >> first, carl has a look at this morning's top headlines. carl? >> thanks, joe. futures this morning relatively flat despite some good numbers in asia overnight. some stories we're watch, kraft sweetens the off for cadbury but they're not impressed. increasing the cash portion after selling pizza business so nestle. cadbury says the new bid offers no increased value over the old one. nestle says with the completion of the pizza deal it will no longer consider bidding. google expected to unveil the new smartphone, the nexus one. early reports say the device is not all that different from the phones on the market that feature android software. shares of googling doubling over the past year. the president set to announce new measures to beef up airline security. he will meet this afternoon with officials who will brief him on reviews of the failed attack on that northwest airlines fliltgh on christmas day. we have former amr chairman, donald carty to discuss the impact of fliers around the world. prudential financial revealing economic outlook for 2010. this is a special media event that comes later this morning. joining us right with a preview on cnbc is ed keon, managing director of prudential quantitative management associations and also mark olson, also a co-chairman of corporate risk advisers. ed, this is big news coming out. your outlook for 2010. you've been feeling a lot more optimistic over the last month as you've seen the economic numbers coming out? >> that's right. we've been describing ourselves as nervously bullish. when the market would go back we'd trim back on guidelines but over the last month or so the data has gotten better in many different ways. the unemployment claims are dropping. we'll get a big number on friday. it's possible to see a positive jobs number for the first time. still, a lot of headwinds facing the market and the economy but it looks to us as though things are looking clearly better now than they did a month or so ago. >> what are some key numbers you'll be watching over the next couple of weeks to see if this is really on track. >> we just got the pmi number, looking at manufacturer, retail sales. basically, when you have a big drop like we had, ordinarily you'll see a big rebound, periods after financial crises are different. you don't get as big a rebound, still headwinds with credit and so forth. on the other hand, you usually would expect with the big drop we've had to see a couple quarters of 7%, 8%, 9%, 10% growth. nobody is expecting that but it means we'll see things like 4%, 5%, which would be good. >> how much is already baked into the market gains we've seen over the last year? where do you think these markets are headed over the next year? >> next year is always difficult to forecast. over a longer period of time, we'll see gains that are pretty good but we'll be struggling to meet averages. valuations are no longer cheap so i think investors should expect high single digits from their equity portfolio but we could see better than that over the next year or so. >> you're talking about the next decade, potentially? >> yes. >> that's where you see bigger problems? >> yes. i think the overhang of what we had to do to get ourselves out of this problem will be with us for a while, especially the big increase in treasury debt. as we get to the middle of this decade we start using you up the slack from this recession, then demographic problems become much more acute as baby boomers get older, pull down their social security and as the work force growth starts to slow down dramatical dramatically. >> it's what you call the turbulent teams. >> question, if that's the moniker for the decade i'll coin it. >> you'll take credit. mark, you've been able to keep an eye on what's happening. do you agree with what ed's talking about, not only over the course of the next year, but over the course of the next decade? >> i'm a little more pessimistic but i think he's closer to the market than i am. we still see that, you know, the softness in housing. i think there will be a real overhang. we see commercial real estate being a real drag on the market. i think there will be a revaluation. we'll see bank failures in 2002 in a greater number than in 2009. and so i think from -- and it may be a question of perspective. i see it slightly different. >> you see it slightly different -- >> slightly softer. >> -- from the economy in particular? >> exactly, exactly. >> if you are trying to sell investors how to invest, let's talk about this year. i know you have thoughts for over the next decade, but just over this year, what would you tell people to do? >> we're slighting overweight equities. we continue to stick with slight overweight emerging markets equities. we've been holding that position for a while, that's still where we're positioning client portfolios. we're still somewhat overweight on higher yield bonds. we still want to have a little more exposure to risk than the typical benchmark we work against. >> when you start talking about bonds, we've had several people who have come in and just looking at treasuries say they wouldn't necessarily be buying over this next year. they're very worried about where the deficit's headed. what comes after that. >> it's not exactly unique insight. people are reluctant to buy treasuries at this level. but there's one little wrinkle, and, again, we're underweight treasuries, but if people start to expect tax rates to go up in 2011, as they probably will, you might see some people pushing income into 2010, which is a short-term effect, granted, but that should help treasuries' cash flow in 2010. there may not be quite as much issuance as there is now. >> does that catch up in 2011 and comes back to bite? >> probably does, but if the economy gains traction in 2010 -- the question is, do you get the power of the basic economic cycle start to kick in in 2010? we don't know that yet. the data in the last month or so suggest those wheels might be starting to turn. >> does that mean you're not worried about a double dip? >> i think if you say, what's the risk? let's say the consensus is 2.5% growth, what's more likely, 5 or 0, i think we're learning towards 5 where three months ago i would likely have said zero. >> have you ever started to start a fire in your fireplace, you're blowing on it and you think, wow, this is really catching, i'm doing good. you stop blowing and it dies in front of you. when cash for clunkers -- >> duraflame. >> okay. >> i can answer that -- you put that in, put the wood on top of the duraflame. you haven't figured that out yet? >> no, i'm using trees. >> you wanted to spray the lighter fluid on it. that was your last idea. >> exactly. things are flammable. cash for clunkers, mortgage, when all those things go away, you're convinced the economy's still going to be standing? >> i think there's a risk we get a slump in the middle of next year for exactly those reasons, but the powerful underlying forces of the logic of economic cycles. you know, in the '57-'58 recession we saw a huge increase in following years, 5% growth over the next decade. no one is expecting that kind of forceful, all the headwind we talked about are clearly still there. the question is, do we start to get people that put back to work? again, key data point this week. then we may get a virtues cycle as opposed to the vicious cycle. >> the takeaway is you are no longer nervously bullish, bullish? >> slightly bullish. >> slightly bullish. >> slightly overweight, equities and other riskier asset classes. we're still looking for more evidence that the better trends you've seen in the last month have legs. we're not quite there yet. >> ed, thank you very much for joining us today. we appreciate your time. we hope to see you soon. >> let's spend more quality time with mark olson. can we call you -- i mean, you're a fed head, basically. member of the board of governors for five years, 2001 to 2006. >> that's correct. i think that would be fair. >> fed head is fair. ceo of risk advisers is that right? >> co-chairman. >> which is a d.c.-based consulting compliant and strategic advisory firm specializing in financial services industry. we have barney frank on later. >> that's right. >> that will be great when we can question him. off camera, just talking all things fed, we were talking about bernanke's speech and how it was taken. my knee-jerk reaction is lately guys like bunning have said, you were there for the 1%, for the greenspan inflation of inflating of the bubble. >> yes, yes. >> it looked to me like he was saying, that's not what caused it. it was a lack of regulation. passing the buck, more or less, and saying that's not what it was. you took it completely different? >> i didn't see passing of the buck. quite differently. what i heard -- i had a lot of fun sunday reading that because it brought me back to the taylor rule, brought me back to the charts ben bernanke loves to do. it was a very thorough analysis in bernanke style. in which is to say he was talking to his economist peers, and like all of you you want to be judged by your peers. ben bernanke is much the same way. he laid out very carefully and very thoroughly against the number one benchmark, the taylor rule, how the u.s. monetary policy impacted the housing bubble. he compared it to the rest of the world. to me, the compelling argument is relative to the rest of the world, our -- the relationship between our monetary policy and the housing bubl is about in the middle. and i think that from here, from this point on, that if anybody is raising the question, were rates kept too low and did that cause the housing bubble, if you're an economist you can't speak to it without looking back to the analysis that ben did on sunday. >> that's interesting. >> so as i read it, you could sense that's what he was doing. he was going back and making the case. one of the clear things de say, however, was that you also have to look at inflation in terms of the expectations as opposed to the inflation you could measure at that time. you could only look back at the impact of the -- at the impact relative to the taylor rule from a -- in retrospect. that's part of what he was doing. then he very clearly said, we should have done more on the regulatory side. i think any of us there would have to agree. >> the fed should have done more? >> fed among others. none of the regulators covered themselves with glory, including the fed on that issue. >> can you characterize what the debate was like at that time? >> sure. >> it was even in the air? >> sure. well, i'll answer separately. on the monetary policy side, remember, it was a very slack economy. we were, for the first time -- well, not for the first time, the second time, we were look at the japanese zero lower bound phenomena where they were caught in a liquidity trap and the judgment was you had to stay low for a long time in order to not get into the trap that the japanese were in. so you had those two factors working for you. plus, there was no inflationary pressure. so, i think at that time, and if you look back, and i think that that's -- to me, when i read the bernanke speech, you know, i -- those were the three parts that i pulled from it. >> what was missed? >> well, we're so used to policymakers talking their own book. i immediately thought -- well, he, in fact, being somewhat nonpolitical, he was trying to give the most analytical analysis of what happened. >> that's how i read it. now, what was missed, becky, the correlations we completely missed. the correlation -- if you look at the low interest rates, you compared them to the explosion in the secondary market, particularly for the nonconforming real estate product, you looked at global liquidity that was happening, we did not take into consideration, i don't think -- i don't remember the discussion where we thought, what are the cumulative effect of all of this and how should we address it? the question of whether you can use monetary policy to address asset bubbles that was a freqeq conversation. and the most frequent response was, yes, perhaps we could catch 3 out of the next 5, but more likely we'll catch 5 out of the next 3. >> right. well, that's one area where he did -- there was some movement in the speech, right? that idea of using rates? >> right. he allowed -- on page 23, 23-page speech, he did say, if all else fails in the regulatory side, that perhaps we can use monetary policy. but i think that the -- i'm sure everybody else that was in -- around there during that time would look back. we made speeches. we saw what we saw was the evaporation, absolutely evaporation of the pricing of risk in the mortgage product. it just went away. investors were willing to accept extraordinary risks for 25 basis points. we could see it building during that time. our focus was on the banking industry itself and are we seeing that -- those -- that type of product get put on the banking balance sheets? well, they weren't getting put onto the greatest extent as part of their loans. it was in their investments. >> he is up for reconfirmation. so he does needs to sort of -- not massage the events but he -- the two guys he's getting it from is bunning, way out here, i can't even reach where he is on the right, and sanders, a socialist -- >> that's right. >> and he's somewhere in the middle. it's almost like the president's problem with a lot of the stuff he's trying to do. >> and i don't think the timely was entirely accidental, don't get me wrong. one thing that was clear when ben bernanke went to the white house, it was clear that he was comfortable in a political environment. he didn't abandon his role as an economist. but he's comfortable in a political environment. >> you need to be. >> if you're going to be a fed chairman, you need to be both. >> we're excited. we've got you here for the next two hours. a lot more to talk about. >> looking forward to it. any comment or questions in the meantime, drop us an e-mail at squawk@cnbc.com. when we come back, the public pension system facing a higher than expected shortfall. orrin cramer will join us to discuss. time for today's aflac trivia question. on this day in 1933, construction began on what u.s. landmark? it's so nice to have company after the accident. aaahhhhh!!! what is it? someone paid me cash! but who? who? aflac. who pays you cash when you're hurt and missing work? aflac. ...cash to help with expenses that health insurance doesn't cover like the mortgage, gas and food. aflac! ahh!!! what now? someone's standing on my foot. all: ahhhh!!!! who could it be? aflac trivia question. on this day in 1933, construction began on what u.s. landmark? the answer, the golden gate bridge, for which 3.25 million cubic feet of dirt was excavated. welcome back, everybody. we've been keeping an eye on the futures this morning. they've been flat lining this morning after kind of turning things around. right now just about at the fair value level. remember, this is coming after a very big day of gains for the markets yesterday. the markets up by 1.5%, or even better, depending on which major averages you were watching. automakers will report december sales today. the industry's expected to have ended 2009 on somewhat of a positive note, believe it or not. you've got a third consecutive month of modest growth expected. a reuters survey suggests u.s. sales on average likely will be coming in at 11 million units adjusted on an annualized rate. that is a better number than we've seen in some time. ford is expected to be the top u.s. automaker with edmonds.com saying ford saw sales rise. pension funds have gone through a rough period during the economic crisis but some say the accounting methods used by those funds may be painting a misleading picks. now with results of his research, orin kramer, general patch of the hedge fund boston providence, campaign fund-raiser for the president. good to have you back. welcome. >> you've got some research. walk us through it, because you compare some of these funds using government accounting standards and private standards, right? >> first of all, so i don't get shot when i come off the air, sis consulting firm in california did the work for us. >> our notes said sis -- it looked like sis. i thought your sister. very nice. >> it's not that close of a relationship. in the simplest terms, if you use government accounting constructs, which mark knows a lot about, which most economists would say involve a number of artificial constructs, which become economic fixes so if you basically went to the state and caught up on all the numbers and say, how funded are you, they're 80% funded against their obligations. if you use the standards that are imposed on corporations, which have some more real-time juice to them, then they're 60% funded on average. if you say, okay, so if you have 60 cents on the dollar, what does that translate into dollars? it means the states aggregate sa little more than $2 trillion more than they have. >> on a grading scale, 88% is a b-plus, 60% is barely a "d," almost an "f". >> if you say there's $2 trillion of promises we made to people and we haven't funded them and everyone's concerned about the size of federal debt and say, well, there's this other $2 trillion we haven't told people about so we divide that by gdp and the debt of governments relative to gdp just went up by 15%. >> can you walk us through where the crisis resides in terms of the various funds and various states? i think we have some graphics built of various funds and where the crisis is. yes? no? >> the consulting firm, first of all s not comfortable with putting out numbers on individual states. second of all, there are some assessmen assessments, et cetera. look, you have a 60% average, so i'll give you one, but the worst in the country, if you use the corporate standards, is illinois teachers. but, you know, if you have a 60% average, that means, obviously, that there are a number of them that have 50 cents for every dollar they ought to have today. >> is the problem coming from these corporate standards looking at real-time data, is that real-time data going to look much better over the next year or two, or is this a serious problem we're just i guess foreing over the course of decades? >> look, i mean, stocks could be up 20% a year for the next three years and that will, you know -- i mean, there are all sorts of things that could, you know, that could happen. but you know, you're severely underfunded now. and one thing it means, i think, from a macro economic perspective, whatever you think gdp is going to be, state and local government is going to be a contractionary force. >> a question, mark? >> all accounting is an estimate, to some extent. they're all based on some premise. it seems to me that one of the important things that has to happen, because of that, is disclosure. is this information disclosed in the same way on the public pensions as it is in the private pension system? >> well, you know, the interesting thing is the lack of interest in it in the sense that, you know, everyone knows federal -- path of federal fiscal policy is mathematically unsustainable. if you take it where the now, you know, sometime after 2027 federal debt is 100% of gdp and, you know, you've got the concord coalition and the cbo and brookings, and everyone does that stuff. no one looks at this data. if you took an 11th grader and took the data that is disclosed by these funds and said, here's how to work the numbers, you're in 11th grade, you've got the skills, they could actually work out the numbers. but, you know, everyone in the system has a vested interest in not knowing these numbers, because by the way if i'm an elected official and you look at the numbers you say, well, i'm sorry, is it you want to cut all these people or you want to cut their benefits? by the way, whose taxes are you going to raise? >> what do you think needs to happen? as an overseer for the new jersey pensions, what needs to happen at this point? >> first of all just let me say in fairness to this outgoing governor, because it's sad, jon corzine did more than any governor in the last 15 years to try and get the pensions funded. and then he runs into the recession, you know, and you can't do anything about it. and they also -- they have a chief investment officer in new jersey, bill clark, and along with north carolina, which is run by janet cowell, those are the two funds that have had the best performance in the country over the last, you know, year. but, look, when you call your broker and you say, how much money do i have? people ask, how much money do i have? no one calls and says, what's my average account balance? brokers, i don't know. when you look at the state, you say, had is the average balance over the last five years. you just look up the number and say, how much money do they have today? that's the starting point of finding a hole. >> you're not necessarily saying that you're recommending they either cut benefits or raise taxes, but you're saying, a choice has to be made and somebody has to be paying attention? >> i would say that ultimately choices will be made because the numbers just don't work. and it takes a couple of years maybe to catch up with the reality. but, you know, if you have accounting fixes -- if you personally owe somebody $15 million your accountant may do you a favor and say, let's not keep it on your balance sheet. >> well, it's definitely eye-opening. we'll have you back very soon. good to see you. orin kramer. a cold snap across multiple parts of the country. a farmer, traveler, commodities trader or someone getting up early and heading into work, you cannot afford to mix today's forecast coming up right after this. first, let's take a look at oil prices this morning. you'll see oil up once again. up about 19 cents to 81.70. national car rental knows i'm picky. so, at national, i go right past the counter... and you get to choose any car in the aisle. choose any car? 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[ whirring ] [ female announcer ] the new community. see it. live it. share it. on the human network. cisco. welcome back. a check on some of the top stories. as we look at futures, in line with fair value. the president will detail new steps to keep air travelers safe. he will make a statement this afternoon following a meeting with intelligence officials. those officials will brief him on reviews of the failed christmas day attack on that northwest airline. kraft is upping the cash portion for cadbury after selling pizza business to nestle. k cadbury is rejecting the offer. home prices in manhattan down 10% to 15% during the fourth quarter compared to a year ago. that comes from several reports released by new york city's biggest real estate brokerages but lower prices are starting to draw in buyers and the trend may already be reversing. kaching! >> if you look at the new york times on the weekends where they have -- they'll show what's available and show the floor plan. it's like, this is a great place. i mean, i would love -- and then you look priced from $10 million to $30 million. that's what they say. there's more than one priced $10 million to $30 million. >> real estate is at a preel yum when you pile everybody on a little island. >> that can't go down 10% to 30% in this city. what kind of place costs $10 million to $30 million when you're selling multiple places. it was on west end avenue. it was beautiful. >> was it a town house? >> no, it's like a floor and a big -- >> but it was -- they had a bunch of them. depending on which one you get, it's somewhere between $10 million and $30 million. who are these people? beautiful living room, like a library. i mean, it looked like a great -- >> you're in the city. i w >> i was thinking it might be nice. >> maybe when the kids are like a -- >> please? >> a city in the city. i spoke french. let's talk about retail gasoline prices. they have jumped about 6 cents in the last week. energy department says the average national price for a gallon of unleaded regular is now $2.67 a gallon. that's up 98 cents from a year ago. you could expect this after what we've seen happening with crude oil. crude oil prices have been skyrocketing and the price of crude accounts for half the cost of making gasoline. crude's back to where it was just about two months ago. moving up for, what, nine sessions in a row now? >> nine straight. >> 20 cents higher to $81.71. >> here's one reason, it is cold. let's check in with scott williams at the weather channel. we'll talk tiger later. we do tyinger and weather. that's been on everyone's lips recently, but weather even more than tiger now. what's going on? >> yeah, well, joe, we continue to find some arctic air across the nation. temperatures will get colder as we move into the middle and the latter part of the week. look at the st. louis reading right now, 4 degrees. miami, south florida, 45 degrees. floridians are shivering as well. not just cold, just frigid across most of the country. new york city, good morning, 21 degrees for you. tampa, 35. so looking at the forecast for today, more snow showers, lake-effect snow interior sections of the northeast and another storm system moving into the high plains. that will bring a chance for snow into the deep south as we move into the latter part of the week. looking for moderate delays as we move into cleveland, buffalo, cincinnati, due to snowfall. right now, new york's laguardia, partly cloudy conditions, lower 20s. look for highs in new york city into the upper 20s. the world's busiest airport, deceptive sunshine, temperatures only topping out in the lower 30s as the day progresses. and as we move into the motor city, a chance for some snow. certainly call ahead. back to you. carl? >> thanks, scott williams, over at the weather channel. we'll get top stories after a break. plus, he ran the federal housing finance agency and now serves as one of wilbur ross's right hand man's. jim lockhart will talk financials and a lot more. what are you doing...? calling chase sapphire, seeing if we have enough points to stay longer. now? you don't have enough time... and you have to push all those buttons... no buttons, someone answers every time. yeah, right... bet you a massage... yeah, ok. hi, julie... i have a question about my points. hi, what button do i press for a massage? hello? new chase sapphire... you call. we answer. no waiting. just press right here... go to chase.com/sapphire. chase what matters. but we're also in the showing-kids- new-worlds business. and the startup-capital- for-barbers business. and the this-won't- hurt-a-bit business. because we don't just work here. we live here. these are our families. and our neighbors. and by changing lives we're in more than the energy business we're in the human energy business. chevron. right now 1.2 million people are on sprint mobile broadband. 31 are streaming a sales conference from the road. 154 are tracking shipments on a train. 33 are iming on a ferry. and 1300 are secretly checking email on vacation. that's happening now. america's most dependable 3g network. bringing you the first and only wireless 4g network. right now get a free 3g/4g device for your laptop. sprint. the now network. deaf, hard-of-hearing and people with speech disabilities access www.sprintrelay.com. welcome back. home prices up five months in a row. the latest case-shiller index suggests the housing market is improving. we're on the home front this morning with w.l. ross, vice chairman jim lockhart, the former head of the federal housing finance agency, a frequent guest here. our guest host is former fed governor mark olson. by the way, these two gentlemen met about 42 years ago. first jobs out of college together? >> that's correct. my hair turned gray, his didn't. >> mine fell out, though. >> i see. >> we've got a lot to talk about what's happening in housing. jim, i know you have some thoughts that we could see improvement in housing this year but we could also see a leg down. you've got a lot of concerns about what's happening with freddie and fannie. >> yes. the real issue to me is that we're we still haven't seen fall off in foreclosure. we could see another spike in foreclosures that could, if we don't handle it properly, result in another down spike in housing prices. >> and when you say handle it properly, what's the proper way to go about dealing -- >> we need to do more in the mortgage modification area. particularly, we need to start forgiving principle. i know it's very tough, but there's 25% of the people now under water on their mortgages. if we want to keep them in their houses, we have to do more than just lower their payments. >> well, who would be suffering? i mean, are you talking about the u.s. taxpayers paying back, or banks just going and forgiving -- >> i'm talking about banks and investors. in many ways they have already marked down these mortgages on their books and certainly investor have marked them down in the securities they own. but that benefit, if you will, hasn't been passed on to some homeowners. at this point i think we need to be more aggressive in modifying mortgages. >> you're not talking about principle reductions? >> i'm talking about principle reduction potentially, yes. >> really? >> yes. i mean, it's something we've been talking about for the last year and a half. and all the solutions have been on the income side. and people's balance sheets are suffering. and it's coming to the point that i think we have to really seriously consider much more aggressively looking at reducing principles. >> you're not the first to come on -- to the table and suggest it. every time our response is, a, how will that fly politically? b, how much would it feed the already populist anger against -- now it's banks but in this case it could be your neighbor, if they didn't -- if they're going to get a haircut and you didn't. >> if it's your neighbor, if that house goes into foreclosu e foreclosure, your house price goes down in value. >> that doesn't work, though, i don't think. you can keep saying it, if it's bad for your neighbor, people are still going to want -- >> right. people that can't afford their mortgages, missed payments, about to go into foreclosure and you've got the alternative of selling the house -- >> but aren't mortgage modifications difficult to do, other than one mortgage at a time? isn't that part of the issue? it's very difficult to do. if you look at the numbers of mortgages -- the number of people in mortgages that don't fit their personal circumstances, you've got three variables, the interest rate, term, or principle balance. one of the -- and most of the cases those first two have been -- we're already at the most liberal area. so the third choice is, i think, the principle balance. and so i think somebody's going to have to take a hit. >> i think that's it. the hamp program i helped design in administration is designed on those first two. getting the income down by lowering the interest rate. and there has to be more aggressive, i think, on looking at principle now. the administration -- >> forced by the administration, banks being forced by the administration? >> well, i think not forced but at least encouraged. i don't think it's going to take -- >> same thing, though, right, because they're not doing it on their own? >> the alternative would be a wae of strategic defaults? we're hearing more about this idea -- robert schiller is quoted in the journal saying people are going to realize they didn't take an oath on the bible to pay these loans back and they'll start to default on their own volition. >> i think there's a big risk of that, strategic defaults will start to happen more and more. you know, you look at the bankruptcy numbers. it's -- the stigma is not there anymore. you know, i think it's a tough decision. there's a lot of moral hazards in it, joe, i agree with you there. but on the other hand, to prevent foreclosures and prevent another spike down in housing, i think something we have to seriously consider. >> freddie and fannie, which you know well -- we were talking a little bit, but that was a number that people were just staggered by. 200 billion each. they had to take that cap away. i mean, aig, that -- a lot of people are still incensed about that. that's not $200 billion. this is $200 billion each and they took the cap off. >> they took the cap off mainly because of the way legislation worked it was going to expire at the end of the year and it was belt and suspenders, to my mind. the idea that they're going to go through the $200 billion may or may not be true. >> your work didn't show that when -- >> when we were there we did stress tests and we didn't get either up to $200 billion. it's four or five months later so things could have changed. my sense is that they did it for strategic reasons. on the other hand, i think it's very clear that the taxpayer will not be repaid the full amount that's already been drawn down, let alone any further draws. >> what were you saying, if fannie and freddie have a lot more but not as many of the bad ones, right? >> yes. they have -- >> three times. >> they have about 31 million mortgages. there's about 7 million in these private label securities. those private label securities have a lot more toxic loans, a lot more under water loans than fannie and freddie. >> that's just a number addition i mean, the journal has gone crazy on it, our own rick santel santelli, that's all he wants to talk about is caps being removed on a $200 billion per -- >> the problem was, and we all know what the problem was, there wasn't legislation strong enough to support fannie and freddie. they were allowed to leverage themselves at 100 to 1, and you'll have big losses when something like this happens. so we're paying for the fact that we didn't get that legislation passed. >> but does it represent the government institutionalizing all of these losses or making public all of these losses? >> that's what's happening, yes. you know, the taxpayer at the end of the day will pay for some of these losses. >> but look at the other side. absent fannie and freddie, where does the support come for housing right now? and what will -- what will be be the impact on the economy? i think there's a bit of a catch-22 with fannie and freddie. >> fannie and freddie are buying or guarantees 75% of all the mortgages made today and with the fha doing virtually the rest. we have to work our way out of that situation. and i think one of the key things that has to happen this year is we need to come up with some proposals of how to fix fannie and freddie. to do it, in my mind, to do it in the private sector. we have to wean the public sector out of housing. >> there will be more private sector than public sector moving forward? >> there has to be. >> this odd marriage that didn't work. >> the odd marriage didn't work and we need a divorce. we really need -- >> this living together thing isn't working out. >> we need to separate the private sector and the public sector. we need a real strong dividing line. going forward. >> jim, thank you very much for coming in today. it's great seeing you. >> great seeing you. >> mark's going to be with us for the rest of the show. so stick around. a market melee, which are the best bets? dueling perspective from s&p sam stovall and jeffrey rosenberg when "squawk box" comes back. snoou corporate debt and equities saw strong performances in 2009. let's see what we might expect for 2010 with sam stovall and jeffrey rosenberg. good morning to you both. good to see you again. >> good morning. sam, if, in fact, this is the second year of this bull market, what historically can n xpect? >> well, historically we can expect a good year but not a great year. certainly the month of january is likely to be fairly strong. since 1932, whenever we've had the first january following a bear market bottom, it has risen about 3.5% versus the more normal 1.5% and it's done so 12 of 14 times. then just for the full year, the second year of a bull market is sort of a repeat in terms of cyclical sectors over defensive ones. we only get worried when we hit the third year. >> so, how does your investment thesis for the year follow those historical averages? >> well, we start with the history and then we try to sigh whether we need to adjust history based on our economic projections, fundamental outlooks and then technical considerations. both of the fundemental and technicals tend to n a sense, embrace historical. we're moderating a little bit based on our economic projections thinking this is going to be a much more muted economic recovery than normal. >> so percentage gains for the s&p this year? >> we think that the s&p will rise to about 1215 by the end of december of this year. so a high single digit price appreciation. >> 1215, that's going to be a long, slow grind. joe's looking -- joe was hoping for 1215 by march. >> that's like kissing your sister, sam. in a northern state. >> you've never seen my sister. >> yeah, that's not bad. you're right. >> that is good. jeff, thoughts on that? do you agree with that view or are you optimistic? >> we're a little more optimistic. on credit, the pore point is that last year it was the unique year. this year you're going to have more normal type credit returns. it's going to be low single digits. for high grade, we're month positive on high yield where we expect a 10% type return. >> your view on treasuries at this point? >> treasuries -- >> would you touch it with a ten-foot pole or just a nine-foot pole? >> nine or ten foot, it's not going to matter much. treasuries will be a safety play but you'll give up principle as we expect rates to rise throughout the year. >> sam, after the manufacturing numbers this week, someone in the journal says the risk of a double dip just went from, i think -- three in five to one in five. do you think we've averted the risk of a double dip, sam in. >> yeah, that's our opinion. it's probably going to be a slow but steady upward grind, maybe see 2% for all of 2010 in terms of gdp growth. ending the year at about a 3.4% quarterly growth. >> well, we're gathering, obviously, everybody's point of view as we kick off the second day of the year. jeff, sam, appreciate your time. good to see you both. >> t ts. when he we come back, the state of the nation's security. the president convening this meeting in the situation room today. who's to blame for that nigerian man's attempt to blow up a plane on christmas? what new measures need to prevent future breaches? former amr chairman don carty will talk about that. with fidelity, you can take your trading around the world, because now you can trade u.s. and foreign stocks online, in 12 markets, 24 hours a day, all from the same account, and settle in u.s. dollars or the local currency. plus, we'll guide you with international research and realtime quotes, so you can diversify your portfolio, wherever -- whenever. and we'll be on call around the clock, while you trade around the globe. fidelity investments. turn here. (announcer) we're in the energy business. but we're also in the showing-kids- new-worlds business. and the startup-capital- for-barbers business. and the this-won't- hurt-a-bit business. because we don't just work here. we live here. these are our families. and our neighbors. and by changing lives we're in more than the energy business we're in the human energy business. chevron. ♪ pump up the volume pump up the volume pump up the volume dance dance ♪ let's take a look at stocks to watch quickly. start with visa downgraded to outperform. had been a top pick at rbc and valuation is cited. ubs is commenting on apple. and the product launches that are forthcoming. the firm doesn't expect apple to use the ces as a launch outlet, but ubs's checks confirm apple -- the tablet is on track to roll out in the first half. and there's the blogs that are talking about this january 26th event where apple has, i don't know, reserved some -- >> isn't that great? hard to do this in a vacuum without -- >> apple is pretty good at keeping secrets. you wonder if they're intentionally letting this slowly leak out. >> you have to have a place to do it, right? and people are going to know and it's kind of -- the roll out of the device. >> good to have a place to do it, carl. >> a package. >> yeah, you're right, a roll out of the package. almost 200 -- this is -- just look at this. almost $200 billion in market cap, apple, which was before -- i mean, you remember they brought in john skully from pepsi and then they brought in gill and it was an $8 billion company. they were going up -- they had this stupid -- the computers are great, but that's all they had, and then jobs comes back and it's a $200 billion -- and now they're bringing out another thing on top of the iphone, which, you know, goldman has been right about that. >> goldman sachs or jim goldman? >> jim goldman. apple's going to be just fine. >> they're just fine. >> they're more than just fine, $20 -- $215 and closing in on a $200 billion market cap. to bet on anything that's been a sure thing, there's nothing -- in the and the apple-loonians are -- >> you're willing to concede defeat? >> i am. >> i'm throwing in the towel on -- it's unbelievable. >> you bought a mac. >> plus we have a mac. i love the elegance of the design and everything else. and the way it works. and i read about -- you read -- i guess people have this relationship with their iphone where it's so intuitive the way everything works that if they can put that into the tablet, it's going to be the same thing for reading. >> it's going to change the way people -- i mean, when was the printing press, right? for centuries we've had this thing where you flip the pages and it's going to be totally diven if this thing works. >> i like my books. anyway, coming up, we have more of the morning's top headlines. plus, few if any washington power players have a bigger impact on wall street than our next guest, barney frank will join us. national car rental knows i'm picky. so, at national, i go right past the counter... and you get to choose any car in the aisle. choose any car? you cannot be serious! okay. seriously, you choose. go national. go like a pro. it all starts with havinglocks more hotels to choose from.. that's why i book with expedia. so i can find someplace familiar... or somewhere more distinctive... nice! then i can compare dates to find out when i can save the most cash. done and done. we should do this more often. more choices, more savings. where you book matters. expedia. ♪ dot com the meeting went great! they loved the presentation! judy, great job on the printing! i'm amanda. tom. james. nice job on our brochures and letterhead. louis, keep up the good work with our shipments. it's -- it's peter. great job, everybody! that's a closet. you know what, guys? take the afternoon off! we can't. that is why i hired you. world's proudest boss. [ male announcer ] we understand. you can never have too much help. fedex office. you must be looking for motorcycle insurance. you're good. thanks. so is our bike insurance. all the coverage you need at a great price. hold on, cowboy. cool. i'm not done -- for less than a dollar a month, you also get 24/7 roadside assistance. right on. yeah, vroom-vroom! sounds like you ran a 500. more like a 900 v-twin. excuse me. well, you're excused. the right insurance for your ride. now, that's progressive. call or click today. tackling some unfinished business. congressman barney frank, chairman of the financial services committee will tell us where the health care overhaul plan is headed in 2010. airline and security, the botched christmas day attempt to bring down an airliner on u.s. soil has the government scrambling for answers. >> systematic failure has occurred. >> long-time airline executive don carty will talk about taking security to the next level. and google wants to get smart. >> this is smart. >> search giant expected to unveil it's new phone. >> gentlemen, beam me aboard. >> will it be enough to knock out the competition? >> when i get ahold of you, i am going to gutted you like a fish -- >> pick up the phone, "squawk's" calling. >> i'm sorry, operator, i can't hear you. shhh! i'm trying to use the phone! >> we begin right now. >> excuse me. excuse me. excuse me. ♪ welcome back to "squawk" here on cnbc. first in business worldwide. i'm carl quintanilla along with joe kernen and becky quick. our guest host today, former fed governor and chairman of corporate risk advisers, mark olson. we've been doing good work for the past hour and coming up we'll take on additional challenges facing the fed and the economy at 8:30 a.m. eastern time. in the meantime, we'll check on the markets after yesterday's bull run that pushed the dow higher by 155 point. we're a little above fair value. joe, did you know we are up 8 out of 10 on the dow? >> that's right because we had that one -- >> and yesterday was our biggest point and percentage gain. >> got g back from thursday, which was -- >> yeah. >> that was the only action last week. down one, up three. >> until the final minutes of the year. >> here's that -- >> what's that? oh, you saw pee wee. >> that's in "usa today." >> doing stage work, i guess. too bad we didn't do papers this morning. >> he's going to guest host. >> paul reubens. >> yeah. we got a request out. >> we can do that over there. >> what was that hand signal? let's get to becky with this morning's headlines. >> joe, that hand signal was the dance from pee wee herman. duh! we have deals coming up, kraft deal sweetening the cash portion for cadbury, using proceeds from a deal to sell north american pizza unit to nestle, including brands like tomorrow stone, california pizza kitchen. nestle says it has no intention to bid for cadbury and they say this new offer has no more value than the old deal. president obama will meet with u.s. intelligence chiefs and other top security officials today. the group will talk about the review of an attempted bombing of a detroit-bound airliner on on christmas. after that meeting president obama will make a statement. plus, we'll be tackling the topic of airline security with don carty, former chairman at 8:40 eastern time. house speaker nancy pelosi will meet with committee chairman today to try to map out her party strategy for getting a health care bill to president obama's desk. democrats say they want legislation passed before the state of the union address. there are some pretty significant divens, though, between the bills that were passed by the house and the senate that have to be ironed out first. joe? >> thanks, becky. we're here with mark olson. fed head is not -- that's not a negative -- that's not a per joertive, correct? you know all about the fed, you were there. i can ask you questions, you can give opinions. >> it's not a bad term. >> it's not a bad term. we talked earlier about bernanke and some of the things he said. also, people said that he opened the door slightly to a more near term rise in rates than previously. is that -- >> i didn't read that. >> he said something -- >> i didn't read that. especially if you put that -- if you also read don cohn's speech, given the same day, same town to a similar audience. it was clear they were going to keep rates low for an extended period of time, at least that's the way i read it. i think they'll respond moving forward. i think they will be willing to signal forward moving forward the extent to which rates are ready to move. i didn't see anything in bernanke's speech that would suggest rates are coming up soon. >> since it's impossible to raise rates when unemployment is on everyone's lips and it's 10%, you really can't do it. doesn't that handcuff the fed from doing what it really needs to do? the dollar has strengthened, the numbers are coming in, the stock market is rising, leading economic indicators. i mean, it's clear to a lot of people that things are on the mend. there are people, maybe some vigilantes, that say now is the time to get cracking, but they can can't. they're handicapped -- or handcuffed by unemployment. >> well, it's not just that. i think when you -- when you're on the fed board, at least my experience was, one of the first things you look at is where inflationary pressure. and it's the inflationary pressure more than the wage inflation, for example, that would -- and you can monitor. i think one of the things the fed does, and larry meyer coming on later, we with talk about the strengths and weaknesses of econometric modeling but the people on the open market committee will be looking at inflationary pressure. when they start seeing inflationary pressure rise -- >> the lack of inflationary pressure back in the -- that got us into the mess in the first place at 1%. that's what you used last time, you said there was no fault because there was no inflationary pressure. certainly inflated a bubble. >> copper, is there price stability in copper right now? >> but -- >> gold? >> with any of the commodities, it's how this flow through into the ultimate product. the exceptions being oil and food. they take that out of -- when they're measuring core inflation. but for a commodity like copper, they would look at the impact of the rise of copper in a finished product. >> that is a harbinger -- gold? >> there are some people that like to look at a basket of commodities and say you ought to base monetary policy on that. i think that's tougher to depend. >> how about tips, they're under control? >> well, you know, they're a good instrument. they adjust for inflation. i think one of the things that's happened is that inflationary expectation is way down. that's something that has happened in the last decade that didn't happen before. and so i think if you look at tips, and you look at the extetd to which -- that will help you measure inflationary pressure. >> japan would give anything to raise rates so that makes people here want to raise rates, but we can't because unemployment is such a lagging indicator. >> you go back to the great depression, and the fed raised rates at exactly the wrong time. and i think we're still -- we're still aware of that. i think that what we can do much better than we ever did in the past is that we can, in fact, measure the corollary effect of all of these pressures. we didn't get them all. but i think in terms of looking at inflationary pressure, i think the fed has a good ability to monitor that. >> okay, great. thanks. i think congressman frank's ready. a reform, a lot of things, overhaul, prominent issues under consideration, joining us from newton, massachusetts, barney frank, chairman of the house financials services committee. great to see you. thanks for joining us. >> thank you. i apologize. traffic was much worse than i anticipated. a five minute ride became a 20-minute ride. >> i know in downtown boston there are a bunch of cow trails -- >> no, maybe this is a good sort of indicator, but this is a full employment traffic jam. >> that's very good. i know you saw another chairman, chairman bernanke's comments. do you agree with him -- >> absolutely. >> the rates weren't too low, it was lack of regulation? >> absolutely. alan greenspan agreed with him. it's happened twice. it's a very important point. i appreciate you getting right to what i think is a central debate. we had this during the dotcom debate, or bubble. there were arguments that regulatory means should have been used. alan greenspan articulated with the dot.com bubble through the housing issue there were no microtools available. that the only way to deflate a bubble was to deflate the whole economy. people ought to understand that's what we're talking about. when people say rates weren't raised high enough, that's an argument that says you can't do anything to prevent a particular mismatch of assets, et cetera, in a segment, unless you deflate the whole economy. i think it is very clear, and greenspan himself, when he testified before henry waxman and the government on oversight committee said he now made a mistake. in 1994 congress gave greenspan the power, at the federal reserve, to regulate mortgages that were given not just by banks but by everybody. especially to go after the kind of trick yl mortgages that were a large problem. alan greenspan explicitly said, no, the market knows better. to his credit when he testified a couple years ago he said, i was wrong, the market needed our help. and i think ben bernanke is exactly right. had we used the power we could have used to regulate subprime mortgages, yeah, there's always going to be cycles but i do think that would have worked. before -- there may be times when you have to deflate the whole economy, with all the pain that causes to a lot of people, but before you resort to deflating an entire economy, you need to try the microtools and that i think ben bernanke says correctly. >> you want to use the scalpel before you use a bludgeon, right? >> correctly. had we stopped subprime mortgages from proliferating the way we did, i think you could have stopped short of a total deflation of the economy. >> if rates were not the key issue, mr. chairman, were they an issue? at the time? >> yeah, they were an enabling factor, no question. and, you know, i guess maybe an analogy is if you drink too much and then you drive, that's a problem. and if you've been driving, that would stop the problem. but, you know, i think that's a fair analogy because the argument is, yes, no matter how much you drink f you didn't drive, you wouldn't kill anybody. but that's far too drastic an approach. so given the failure to regulate appropriately, then things are going to go wrong and rates are a problem. on the other hand, again, and i do have to emphasize, people shouldn't just talk antiseptically about raising rates. they ought to be clear what they're talking about. reducing economic activity. the reason for raising rates is that you reduce economic activity and that brings on the good and bad alike. >> chairman, we had jim lockhart on. when he was intimately involved with fannie and freddie he didn't see over $200 billion, nothing close to that, but he admitted it was five months ago. he said it was like -- or when you remove the caps it was because it was like a suspenders/belt situation, thaw didn't need both. it doesn't necessarily indicate the losses are going to run that high. do you have a better feel for how much -- how much we're talking about here? why -- >> no, i don't. and i think jim lockhart's experience entitles his views to a lot of deference. i would say this, remember now, fannie and freddie have been converted. they were problematic before. we didn't get around till 2007, passing that reform. i will say, i became chairman of the committee in 2007. and within a few months we had passed the reform that the administration wanted, but it came too late. i acknowledge that. but the point i would say is this, part of the losses of fannie and freddie is that since the housing collapse, fannie mae and freddie mac have become like a public utility. they're not like what they used to be, inappropriately hybrid public stock company, public policy instrument. they have become the public utility that finances housing in america to a great extent. particularly, multifamily housing. people who believe multifamily housing has an important role should understand that fannie mae and freddie mac have been the major sources for that. so part of the losses, a public policies decision that it would be worse not to have at least some support for the housing market. >> mr. chairman, a lot of us are focusing this year on financial reform, all those regulatory reform measures that are going to be going through. some of the biggest concerns we've heard on this program have been about what's happening in the senate under your counterpart chris dodd. some of the things that have been brought forth for the fed, there are concerns we've heard that it would take a lot of the regulatory muscle away from the fed. do you share any of those concerns? >> i share some of those concerns, yes. i will say in the bill that passed the house, by the way, the federal reserve was a big loser. there's a paradox here. many of my republican colleagues have been in the forefront of saying, let's take power away from the federal reserve, but they've been defenders of the federal reserve in one very important area. ironically, i don't think anybody would have decided this was the best way to do things, but the way it worked out, the federal reserve is now the major protector of consumers in the financial area. if you look at the laws on the books to protect consumers, whether it's credit cards, mortgages, overdrafts, almost all that power's in the fed. the bill that passed the house takes that away from the fed and other bank regulators and put it in a consumer financial protection agency. i understand the notion of that. is causing a lot of your viewers to choke on their coffee. but it is the biggest move away from the federal reserve. now, there are some who say we don't like the fed but they want to leave those consumer powers there. frankly, i don't think they mind they're not used well. but beyond that, i do think -- by the way, i think senator dodd is doing an excellent job with a very tough situation in the senate. he's got a much harder job because of procedural rules there. but, i do disagree with him on the bank regulatory area. for one thing, i disagree with abolishing the fdic. look, people talk about we have too many regulators in america. yes, we-f we started from scratch we won't have a separate s.e.c. and ftc but we have what we call the dual banking system. state-chartered banks and national chartered banks which no other country has. the fdic is the regulator of the state banks. it would be a mistake and cause a lot of con center nation, unhappy with state bank regulators to abolish that. with regard to the fed, yes, doi think we should be curtailing their powers. we curtailed in our bill not just the consumer power, but the power under section 13-3 which led them to give hundreds of billions of dollars out. we severely restrict that. that was a bipartisan approach. but when it comes to regulating bank activity, i think it's a mistake to take that away from the fed. >> mr. chairman, do you think that a law that says homeowners in distress should have the principle of their mortgage reduced would ever fly on the hill? or in this country? >> the only way to do that would be by -- by bankruptcy. that is, you can't -- and there's an argument there. what we're saying is -- okay, and i voted for that. if you are in serious trouble and you are prepared to accept bankruptcy as the price of reducing your principle -- and bankruptcy is not a fun thing. people shouldn't think anybody is going to want to do that, not if we enforce if right, particularly since bankruptcy has been made less present for the creditors, less fair, but that's the fact. if you simply say anybody in distress can get a principle reduction, you've got a couple of problems. first of all, you could be abrogating contracts. remember, we have a constitutional provision against abrogating contracts. the one exception is bankruptcy, that's in the constitution. again, with bankruptcy, it's an abro gags of a contract which comes at some price to the beneficiary of the abro gags, the person whose debt is reduced. to offer that without any price is a problem because how do you enforce this? what do you then say to the individual who says, wait a minute, equal sishs, i've got the same mortgage she's got, i've been more prudent, i'm not in distress, she does, why does she get the reduction? if that's done on a voluntary pressure, that's okay. i think that's in the interest much v of everybody. but to mandate that across the board, what would we say in the law? what level of distress qualifies you? how do we prevent you from getting yourself into distress? if it's voluntary you can control that better. no, i don't favor that. what i do think, by the way, on the foreclosure, i would like to distinguish, there are some people who are in trouble now because they got mortgages they shouldn't have gotten and they will probably -- they will never be able to pay them back. in some cases they were imprudent. other cases they were mislead. there's a new category of foreclosures threatening us now and that's people who got a perfectly reasonable mortgage, appropriate to their circumstance but they have been unimpd employed for longer than expected because of the depths of this recession. we do have a bill that passed the house that would take money from the t.a.r.p. that's being repaid and lend it, not give it, but lend it to mortgageholders who mortgages are in a reasonable position and whose only problem is because they're unemployed they can't pay the mortgage. that's not reducing the principle. it is lending them the money. it's based on a program that worked in pennsylvania and has done a great deal of work. again, we need to separate out, that category of people in mortgage distress, i believe, we could avoid foreclosure for many of them in a way that is economically and socially useful. >> mr. chairman, i thought we had addressed the too big to fail issue in 1991 with a prompt corrective action. and yet when the -- when institutions came along that were clearly too big to fail, at least too big in terms of the expectation of what the impact would be, we recognized we needed to move on to looking at systematic risk in a different way, which your bill does. my question is, how do you see that playing out? how do you see that actually being implemented by the regulator? >> mark, is this you? i don't see the screen. >> yes, it is. >> not surprising. exactly right. the point, as you know, which dealt with the commercial banks after the problem of the loans in '91 dealt with banks. and if you look at what were the institutions that triggered this whole problem in the too big to fail, they were nonbanks. it was aig, lehman brothers, bear stearns. they were not, by definition, covered by fish because they were nonbanks. what our bill does, you're exactly right, which is how we want to use the fed, we now take all the regulators together. people have said, didn't they have the authority? well, not so much. the regulator's authority under existing law is really aimed at existing institutions. no one has the responsibility for looking at a cumulative impact. and it's especially the case, and in the nonbank area, by the way, the too big to fail problem, mark makes a good point, we haven't had the too big to fail problem with banks. wachovia failed. it was taken over by wells fa o fargo. there was pain there but not the kind of problem you got with aig or lehman brothers, which were the nonbanks. in effect what we've done is take the regime we have for the -- they use the word resolving but resolving here means dissolving. we took -- we took the model of what we do with a bank that's failing, we put it out of business and applied that to other financial institutions. that's the key part of the bill. it says to the financial regulatory council, all the regulators, you have to monitor what's happening. if there is either a large institution or an activity, such as subprime loans, which is threatening us, long before we reach the cliff, you've got to put the brakes on. it's at that point the federal reserve has power, only after there is a des i guess nation of systematic risk. to avoid this moral hazard issue, you don't have a situation where you were designated as too big to fail and no corrective action is taken. so you, then, have this aa badge and can collect assets. you are designated as a systematic risk and that ooblgtly means there has to be restrictions. your capital has to be raised more proportionally to your size, your activities are restricted, you may have to divest a particular branch of activity. the fed works there as the agent of the council. >> one more question, you in the house have moved much more quickly than they have in the senate. you have the bill that has now passed the house, but as always the case, it is with a number of amendments. are there parts of the bill you would like to go back and -- are you happy with the bill as it came out of the house or the things you'd like to do differently with it? >> sure, there are. you know, you make a tradeoff when you stop being just a member and you become the chairman. you get more power but you lose autono autonomy. if i were writing the bill it would be different. i would like to toughen up a little bit, well, somewhat, in the derivatives area. i would modify the fed auditing provision. i think it was important to go forward with auditing the fed. i was a supporter of henry gonzalez 20 years ago. people forget the open market committee used to not tell you what its decision was. a rather bizarre thing. let's influence interest rate but let's not tell anybody how we're going to do that. and we were told that would have terrible problems. i think it's made them frankly more effective. i would modify that. i would say the senate has moved more slowly but that's the nature of the senate. i think chris dodd has done a great job as chairman in a number of areas. and i -- we are very close in concept. i don't agree with abolishing with a single bank regulator. i very much want to for the consumer protection agency to% beyond that there's a great deal of agreements. >> i want to quote one of the great new york papers, you probably think i'm talking about "the times." "the post," but here's the headline, dems shut out gop on health, reid and pelosi have decided not to impanel a conference committee because it would give republicans an opportunity to stonewall. is that a fact, number one? number two, how do you expect the house to go, just rubber stamp the senate deal? is that the way it's going to come down? >> no -- yes, i think that's the way it's going to go. republicans have basically said they're not for it. >> so no reason to have the -- no reason to even have that committee? >> no. by the way, to the extent the republicans are lamenting the absence of a conference, they are born again conference advocates. for 12 years we didn't have any when they were in power. both sides tend to use those arguments. what counts is substance. i don't think the public is concerned about whether or not there is a conference committee or not. they have a right to look at the substance to make sure it's voted on. i think the house will be pushing for some changes in the senate bill. and the question is, what do you need to hold 60 votes? you know, i wish it didn't take 60 votes to pass everything in the senate but i wish i could eat more and not gain weight. and i have found that when i act on my wishes, without taking reality into account, it doesn't always go so well. so we will be working to make some changes that -- and i think there is some parts of the house bill where the senate did it better and vice versa. i think the senate's bill basic outline, it's going to be hard to change them but there's room for improvement. >> what about november? depends on where you read, but i have read that some democrats are quite concerned already about what finally happens in november. are you concerned? >> well, first of all, we are by profession -- >> worried? >> -- deeply neurotic. i have colleagues who haven't had opponents for the last 14 years and worried about the next election. people underestimate the power of democracy and the impact on us. when hundreds of thousands of people every two years go into a dark booth by themselves and decide your fate, it's hard to get complacent, which is a good thing for democracy. i would say this, it depends on the economy. i think two months ago democrats were feeling gloomier because we were less optimistic about turn-around in the economy. and if the economic numbers continue to improve, and they never improve in a straight line, and -- but i think part of what larry summers said may be relevant here once heard larry say turn-arounds take longer than you expect in the economy but then they happen more rapidly than you expect. if we have beginning in a -- i don't know what the numbers will be on friday, but if by the february numbers that come out you're seeing job improvement, you're seeing continued improvement elsewhere, then it's a very different story. and so i don't see how anybody could predict november. you can't go -- you can't go directly to go. you've got to go through the economic numbers. and i think they're going to be better and that makes me not pessimistic at all. >> thank you. we had 25 satellite window. somehow, we were all holding our breath because when it just goes dark, people -- anyway, it's unsettling. we made it. it can happen at any time, but thank you for your time. >> thank you. i apologize for the traffic. >> that's okay. thanks. when we come back, pick up the phone, google is on the line. we'll talk more about its phone, which we think will change the nature and the world of mobile connectivity in this country. stalk more about that after a short break. also don carty joining us, former amr chairman. in these turbulent times, you want a financial partner who promptly gets you... the information you need. at northern trust, our sophisticated technology... puts the most accurate information at your fingertips. so while you may find yourself waiting now and then, it won't be for the numbers you wanted by 7am. ♪ northern trust. wealth management. asset management. asset servicing. but we're also in the showing-kids- new-worlds business. and the startup-capital- for-barbers business. and the this-won't- hurt-a-bit business. because we don't just work here. we live here. these are our families. and our neighbors. and by changing lives we're in more than the energy business we're in the human energy business. chevron. welcome back, everybody. we have break news for you just hitting the wires right now. berkshire hathaway, which owns 9.4% of kraft shares outstanding has voted no on kraft's proposal to authorize to offer 370 million shares of cadbury. we've been talking about this news throughout the morning. kraft had earlier said it was raising its cash portion for that deal. now berkshire hathaway coming out ask saying it's voting no. kraft had to go ahead and put a proxy to the shareholders asking them if they would approve it's issuance of more shares to the tune of up to 370 million shares so it could go ahead and pay for that bid it has already made for cadbury. the news on this, berkshire hathaway voting no. this is incredibly significant because berkshire hathaway is the largest owner of the kraft shares outstanding, owning 9.4% of the shares outstanding, which is much more than the board of directors of kraft owns on its own. in this press release they go on to say, a shareholder voting yes today is tloering a huge transaction without knowing its cost or the means of payment. what we know with certainty is that kraft stock at current price of $27 is a very expensive currency to be used in an acquisition. earlier today, kraft had talked about extending this cash portion of its offer and saying for two reasons, for one, some of the cadbury shareholders had said they would be very interested in getting cash instead of stock. also pointed out that some of kraft shareholders didn't want to see so much stock used for this purchase. >> they also added, they would change their vote if in some way the kraft shareholder value was not destroyed. >> i guess part of the issue is, is that it says here our understanding is that kraft must announce its final offer by january 19th but the shareholder vote is going on right now, asking them to go ahead and issue -- get approval to issue all these new shares. i guess they'll wait and see what the final offer is for kraft before they decide definitively. at this point, berkshire hathaway is voting no on that proxy from kraft. the proposal to authorize the issue answer of 250 million shares to facilitate the acquisition of cadbury. cadbury shares were under pressure earlier because nestle, went it bought this unit from kraft, the pizza unit, saying it would not be in the bidding for this. you didn't see a bidding war -- >> one player out. >> one player out the door and you saw cadbury shares under pressure. it will be interesting to see where this continues. kraft foods responding positively, up better by 3.2%, i guess on the news that there may be the deal doesn't go through, or at least doesn't get a raised offer as a lot of people had been anticipating. the bid/ask on cadbury, under quite a bit of pressure. looks like it's down a little further at this point. we'll continue to follow this. but berkshire hathaway owns 9.4% of the shares outstanding for kraft. so its vote matters. >> the risk arbotrage guys, they're long kraft, so if this scuttles the deal, they've got to cover their shorts on craft. >> you know, we had interviewed warren buffett of berkshire hathaway of the kraft deal before. he said at the time when the deal was made that the offer represented a very full offer price at that point. i guess you could read from that, he's suggesting the deal not be -- or the bid offer not be raised. we'll still see what happens. >> he had nice things to say about rosen felt at the time. >> who runs kraft. >> it was too rich for his blood. >> i think he can just sort of say no to this deal, can't he? you're going to go ahead without your biggest shareholder, who happens to be warren buffett? >> kraft said earlier it was raising the cash poers of their offer but cadbury said the bid didn't change, it was just a different deal. it wasn't a breakout of the deal components but not a better offer. >> and with hershey not stepping up. we'll see. that's obviously moving different companies. google is. anded to unveil the highly anticipated smartphone today. our sill can valley burrow chief is outside headquarters of google awaiting the big announcement. good morning to you. >> reporter: good morning. it's an unusually chilly morning out here in silicon valley but competition will be heating up in the smartphone market later this morning. as you said, today is the day, the big day, in fact, google, the software and search leader, will be entering the hardware business. the company will formally unveil its own entry into the increasingly crowded smartphone market with the nexus one, the code name of its own smartphone. this was basically built by htc but designed from the ground up by google. but it will be super fast, sure, super sleek, definitely, but maybe most importantly to consumers, it will also be unlocked. that is absolutely key. that means consumers will be able to choose their own carrier. that's important at an estimated $535 per phone at retail. this phone ain't cheap. its success may depend on what kind of subsity. using it's own branded phone to show competitors and consumers what smartphones can truly be capable of. >> if you think about what happened which they launched the google voice product, you can't use it on an iphone, that's a closed system. they want consumers to understand, if this system is open, here are all the additional things you can do. if you as a consumer want it, eventually, hopefully it's available to you. >> reporter: google opening itself up as a direct competitor to the iphone. google doesn't have an online digital media store, ala, itunes. that may be an achiles heel, at least until google comes up with a store of its own. this event begins at 1:00 eastern, just about 4 1/2 short hours from now. i'll be inside live blogging this event. you can follow along at techcheck.cnbc.com. this is going to be very interesting. >> different from twittering? >> what? >> live blogging? >> yes. i'm telling joe that live blogging is different from twittering. >> oh, much different from twitter. war for compelling, real time, cool stuff, analysis along the way. we'll have it all. >> thanks. when we go to break, will you help me? >> yes. >> thanks very much, jim. going to be an interesting day, interesting month for tech. we have a strategy session for the fed and a former airline ceo sounding off on security. art cashin's take on the really big rally that started off the new decade of trading. ngry for . trading is all about strategy. and strategy... is all about information. heat mapping shows me where the money's moving. twenty five hundred stocks... one quick look. that's where the action is. plus, this amazing gadget... it's called the telephone. i can call td ameritrade anytime and talk trades, strategy... anything. td ameritrade. built by traders, for traders. this is what i need. announcer: trade commission free for 30 days, plus get 100 dollars cash, when you open an account. snoou welcome back. day a look at the futures welcome back. take a look at the futures. down about eight point below fair value. we're three weeks away from the fed meeting of 2010. joining us now to take a look at the challenges facing the fed are larry meyer of macro economic advisers, a vice chairman there, former federal reserve governor. our guest host is mark olson, co-chairman of corporate risk advisers and also a federal reserve chairman and steve liesman, also a former fed governor -- no, not really. thank you for -- >> future, future fed governor. >> larry, we've been talking an awful lot this morning about what we can take away from bernanke's comment on sunday and how the fed is going to maneuver this mine field of an exit strategy and how it lays that out for the markets. how tricky of a situation is that and what do you think we can expect to hear from the fed coming up from this next fed meeting? >> well, i think first of all, we didn't learn anything really about exit strategy from the chairman we didn't know before. and, you know, the fed is certainly developing an exit strategy. i mean, the questions are, first of all, the timing, what drives the timing. the second question is, what the sequence of steps should be taken leading up to the first increase in interest rates. and how to communicate that to the market. you know, i think that while there's a lot of talk about exit, and it's very important the fed think hard about exit, exit from a near zero rate policy is a very long way away. we shouldn't confuse talk about exit strategy with an imminent or near term rise. >> when you say a long time away, some mean ten years, others mean three weeks. what's a long time to you? >> nobody defines either of those as a relevant time horizon. i'm talking about the middle of 2011. that's relatively -- i call that a late exit, relative to what's built into the market and relative to many expectations. >> larry, there's a real opportunity here between the two former fed governors to convene the smoc but i know it's an "squawk" open market committee. let's deal with that $2 billion balance sheet. larry, do you start to winnow it down this year? >> i think the question here is whether or not you begin to shrink the balance sheet and withdraw reserves well before you're prepared to raise rates. i think the answer to that is, no. if you begin to raise rates, no matter how you communicate it to the market, that's going to be seen as the first tightening. that's going to have the same effect as if you began to raise rates. >> let me throw it to mark since we don't have as much time as you guys had in the open market committee meeting. would you begin to winnow down the balance sheet? if so, how would you do it? >> it's a process that has begun. if you look at some liquidity -- >> right, some have run off. >> the currency swaps with the other -- with other governments, that has happened. some of the other liquidity facilities have. but in terms -- i absolutely agree with larry that they're not -- particularly with regard to the mortgage backs. i don't think the fed will start reducing that until they have some sense of what the -- of what the impact of that will have on the economy. >> larry, let's say the data comes in better than expected this week. let's say there is some job growth. let's say the unemployment rate does tick down. does that hasten the day the fed should begin to cut rates? sorry, raise rates. >> one report doesn't mean anything. it could just be noise. let's not get carried away with the information that comes in in one day. the question is, are we going to change the forecast? is the fed going to change the forecast that the unemployment rate is likely to. 9.5% at the end of next year and inflation close to 1%? you have to tell me whether, if that's the circumstance at the end of 2010, whether you really believe that the fmoc would begin to tighten as early as -- >> is that how you talk to greenspan, larry? >> well, sometimes. >> sometimes, okay. we've got to go. >> larry, thank you very much for joining us. steve, thank you. we'll see you again very soon. mark will be with us for the rest of the show. when we come back, we'll talk about airline and security, ceo of amr, don carty will tell us where the government has been when it comes to security, what's going wrong when it comes to beefing it up when "squawk box" comes back. charles needs those contracts tomorrow morning. we should send them overnight with fedex. i already sent them. i didn't use fedex. better cross your fingers. [ man ] oh, yeah, the accident. well, you better knock on wood. remember, we did a green renovation in here, there's no wood. but russ bought a rabbit's foot. it's a bear claw. you could throw salt over your shoulder. actually, that's a salt substitute. but you should find dan -- i think he's a leprechaun. what is it about me that says leprechaun? can someone tell me please, someone? you should have used fedex. [ male announcer ] we understand. you need reliable overnight shipping. fedex. all right. welcome back, everybody. in the last 15 minutes we've got breaking news on the kraft bid for cadbury. we just learned berkshire hathaway voted no no on kraft's proposal to issue up to 370 million shares to buy cadbury. that press release put out by berkshire hathaway, which owns 9.4% of cavitkraft, says one of big problems is the idea of voting yes today, thrauthorizin big problem that they point out is the use of kraft shares to buy the company in this offer. they say using that stock, it's kraft's true value is only the current price of $27 a share, very concerned about using too much stock to buy that. we asked warren buffett about kraft's bid back on september 6th, right after that bid was made. >> i mean, kraft has got -- any time you're in a takeover, you know, the animal spirits run high and all of that, but kraft has the disadvantage of using an undervalued stock. so if you -- if part of your currency is a stock worth more than you're selling for and paying full negotiated value for the other guy's proper, you wouldn't sell your own property for anything like the market price, it's -- it makes it a tough game. so it's a full price. >> earlier this morning we had heard from kraft, changing the makeup of the cash portion of its offer, saying it was adding 60 cents a share and cash, replacing part of of that stock element because of a sell it made to nestle, selling its pizza business to nestle, raising more money for cadbury and ends up taking nestle out of the running to be a competing bid for cadbury. >> i mean, kraft is cheese, isn't it? pizza? i see synergies there. warren's no slouch. i understand what he's saying. kraft f you're using your shares and they're totally undervalued to buy something, then it's already a full unfair value. kraft will eventually go up and they're getting kraft stock. the writing was almost on the wall there that if they went up above where they were, that -- >> what they say is in 20 # 07 kraft spent $3.6 billion to buy back shares at about $33 a share, presumably because the directors and management thought the shares to be worth more. >> get the cheese unit -- get the pizza unit back. they make cheese. put the cheese on the pizza. you don't put cheese in candy. i mean, kidneys, carl. >> you would not try to market that? >> no. peanut butter and jelly, smuckers and, you know, jiffy, that i understand. the president meets with intelligence officials today to find out how a nigerian man on the terror watch list was able to sneak explosives onto that northwest flight on christmas day. don carty is chairman of virgin and aviation holdings, also on the board of hawaiian airlines. good to have you back. good morning. >> good to be back. thank you. >> of the view that has been, i think, said among well in the recent days is that this was a pretty terrible violation of safety measures, right? >> yeah. well, this was clearly a failure. a failure in a number of ways. the first example of a failure, of course, the fact this guy got through security. i think clearly the government -- the onus is on the government to plain how that happened, why it happened and what actions they need to take to prevent it from happening again. second of all, it appears at least from the press this was a known individual. the fact that he wasn't on a no-fly list, i think, is something that, again, the onus is on the government to explain why that happened and how -- and what steps will be taken to make sure it never happens again. >> clearly, that no-fly list is going to be added to in the coming days. all that said, all of that said, though, you think the government in their immediate response at last overreact overreacted. can you explain that? >> well, i think the government took a number of steps immediately that may be a normal reaction to these kind of events but it wasn't a thought-through reaction. i think yesterday's action where they narrowed the number of people they were going to focus on was a far more sensible reaction. all we had over the weekend was, you know, literally absolute chaos and airports s outside t country where airplanes were destined to the united states, i happened to be in canada at the time, they were being asked to show up three hours before the flights that were many in cases less than an hour to go through a procedure that obviously consumed an enormous a effort and manpower but really didn't attack the issues that were identified when this guy got on an airplane. >> yeah. we keep talking about israel and all alal and the way they extreme passengers in and out of that country. is that going to happen to us? is the nature of flying going to be different from this point on? >> i think -- my own view is that we really need to begin to focus more and more on attacking the security question where we know there are issues. and i think the government took one small step yesterday in narrowing the attention that they're going to pay to people from certain countries of interest and from countries that are known state sponsors of terrorism. on the other end of the spectrum, of course, there are literally millions and millions of americans that would be willing to undergo some kind of an advanced scrutiny and investigation to make sure that their travel was facilitated. so i think that's the next step. some kind of far more advanced trust traed traveler program. >> you like that. >> can-fly list. >> you like that. no a no-fly list. a can-fly list. >> i will pass, mark will pass. becky will pass. my late mother would have passed. >> it's a privilege, not a right, in other words. >> yeah. >> i watched my 10-year-old son subjected to a patdown that took three or four minutes of a security individual's time. an absolute waste of valuable security resources that could far better be used attacking where we know the issues are. >> yeah. i mean, we keep talking about privacy and political correctness, don, but i think those things are losing to people's willingness to put up with something in order to be safe. >> i think most americans want a high level of security, but they also want to be able to get through an airport in a sensible kind of way. and i think differentiating between passengers is the answer to both of those questions. >> yeah. we don't have time this morning to talk about the revenue impact and the economy, but hopefully you'll be back soon, don. always good to see you. >> i look forward to it. the bulls starting 2010 off with a bang. we'll check out the futures and get final word on the fed from our guests on "squawk box." we'll be right back. national car rental knows i'm picky. so, at national, i go right past the counter... and you get to choose any car in the aisle. choose any car? 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