Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

Herbert Henkel, Chairman & CEO of Ingersoll-Rand.

Ian Telfer, Goldcorp CEO, and Michael Dudas, Bear Stearns Mining Analyst, to discuss gold and the Barrick Gold/Placer Dome merger.

A market discussion with Gene Henssler, President & Chief Investment Officer G.W. Henssler & Associates.

An economic debate between Paul McCulley, portfolio manager at Pimco, and Joe LaVorgna, Deutsche Bank Chief Fixed Income Economist & Managing Director.


TONIGHT'S POLL:

Is Judge Alito the answer to President Bush's problems?

Cast you vote at www.kudlowcnbc.com.

Fed Members

With Ben Bernanke’s nomination as Chairman of the Federal Reserve, there are still two open seats on the Fed. My sources tell me there are three names in the lead for these two seats.

First is Richard Clarida, former Treasury Assistant Secretary for Economic Policy, now teaching at Columbia University and consulting with the Clinton Group, a New York hedge fund.

Second is Randy Kroszner, a former CEA member, who is now teaching at the University of Chicago.

Third is Kevin Warsh, who is presently a senior assistant to Bush economic czar Al Hubbard.

With the Bernanke nomination now in process, look for nominations to the open board seats to happen fairly quickly.

Also, Roger Ferguson may depart from the Fed after losing out to Bernanke for the chairmanship. That would, of course, open up a third nomination to the Board of Governors of the central bank.

A Step in the Right Direction

It looks like President Bush is getting back to the basics with the nomination of conservative judge Samuel Alito to the Supreme Court. This was a good choice and demonstrates Bush is trying to win back support from Republican base.

Look out for a Capital Hill Brawl...


Here is a bullet-point guide to Alito:

*** Strong Conservative, "a favorite son of the political right.”

*** Educated at Princeton, earned law degree from Yale.

*** Bush Senior tapped him for the 3rd U.S. Circuit Court of Appeals back in 1990.

*** Alito has been a strong conservative voice over the course of his fifteen years on the bench (a tenure that gives him more appellate experience than almost any previous Supreme Court nominee).

*** Strict interpreter of the Constitution (critics call him "Scalito" and "Scalia Lite")

*** Frequent dissenter on the 3rd Circuit, one of the most liberal federal appellate benches in the nation.

*** A powerful voice for the First Amendment's guarantees of free speech and the free exercise of religion.

*** Italian-American

*** Tough on crime. Narrowly construes prisoners' and criminals' rights

*** Appears to tilt pro-life, but not a 100% "down-the-line" abortion foe. Abortion rights groups are already criticizing the choice. (In Planned Parenthood v. Casey, Alito was the sole dissenter on the Third Circuit, which struck down a Pennsylvania law requiring women seeking abortions to consult their husbands.)

*** Authored majority opinion upholding a city's right to stage a holiday display that included a Nativity scene and a menorah because the city also included secular symbols and a banner emphasizing the importance of diversity.

*** A former prosecutor and government attorney. Has argued 12 cases before the Supreme Court. Worked in the solicitor general's office during Reagan administration.

Also, be sure to check out my latest column over at the National Review. Bush needs to reinvigorate policies promoting large spending cuts, tax-cut extensions, and pro-growth tax reform, as well as immigration and tort reform. Pursuing this course will help him overcome recent setbacks.

Beyond the Indictments

So who leaked?

The investigation was after all about a leak of classified government information, namely the clandestine intelligence service of Mrs. Wilson. We know that Scooter Libby made a whole bunch of bad mistakes, and now he will go to trial on five counts of perjury, false statements and obstruction of justice. But we still don’t know who the leaker was. Perhaps Mr. Cheney simply called George Tenet over at the CIA and said George “Who the hell is Joseph Wilson? I never sent him to Niger or anywhere else. Why is he writing this crazy stuff in the NY Times?” That’s just my speculation about the leak. But Cheney never told Scooter Libby to go out and mouth off to various big shot reporters like Russert, Cooper and Miller. The White House should have merely issued a statement saying they had no knowledge of Wilson’s assignment, and just left it that.

Rove for the moment has escaped with his life as special prosecutor Fitzgerald has bent over backwards to allow certain Rove “corrections” into the grand jury record in return for total cooperation in the investigation. More to be revealed on that front.

Meanwhile the stock market had a great day. Mostly because of the 3.8 percent GDP number and the 1.3 percent core inflation. This is a spectacular performance despite two major hurricanes and what not. For Mr. Bush’s recovery, the economy provides a good base.

President Bush has his work cut out for him. He must step up to the plate and reinvigorate his policy machine. Bush needs to promote large spending cuts, tax cut extensions, tax reform, tort reform, immigration, and of course, Iraq.

The second term White House looks tired and could use an infusion of new blood in all the key areas, indictments or not. A good strong conservative Supreme Court nomination is a must. Bush’s conservative base is still with him, but he must produce policy results. Incidentally, the Bill Frist/Dennis Hastert broadside attack on oil company profits is anti-capitalist insanity reminiscent of the Jimmy Carter years. That’s the only real comparison with the Watergate 1970’s.

Tonight's Special Lineup

Larry will be live from Washington on CNBC tonight with all of today's breaking news.

Tonight's lineup includes:

Lanny Davis, Former Special Counsel to President Clinton and "Truth to Tell" Author, along with Mike Carvin, Former Justice Dept. Attorney/Jones Day Law Firm Partner, to discuss the Scooter Libby indictment and Miers' withdrawl, all from a legal perspective.

Wayne Slater, The Dallas Morning News Sr. Political Writer, and John Fund OpinionJournal.com Columnist, to address the indictments from a political perspective.

Bill Zollars, Yellow Roadway CEO, to talk about Yellow's earnings and the transportation sector.

And a market discussion with Donald Luskin, Trend Macro Chief Investment Officer and John Augustine, Fifth Third Asset Management Chief Investment Strategist.


TONIGHT'S POLL:

Which of the following is President Bush's biggest second term problem?

Harriet Miers?

Katrina Response?

Gas Prices/Economy?

CIA Leak Investigation?

Cast your vote at www.kudlowcnbc.com.

Look Beneath the Surface

“Oil companies are making too much money and have been slow to expand production.”

This is the unfortunate and misguided refrain being sounded by many politicians, as oil companies like Exxon Mobil report record profits. What is missing from such rash and disingenuous statements, is a more careful and probing look beneath the surface at economic reality.

The key point is that oil profit margins are completely moderate. Exxon, for example, posted just under $10 billion in third quarter net income, on revenue of $100 billion. This means profits as percentage of sales are running around eight to ten percent, only slightly higher than ongoing run averages. This is obviously a result of the bulge in oil prices over the past year.

A deeper look will also show that energy and oil profit margins rank in the middle of the ten major S & P 500 major sectors like financials, health care, and technology, which run around fifteen to twenty percent profit margins. So the current windfall profits campaign, heralded by politicians on both sides of the aisle, is nothing more than a stupid, anti-capitalist, anti-market political barrage. It is politics at its worst. It is Republicans at their worst.

In particular, Republicans Hastert and Frist should be ashamed of themselves. They are catering to snap polls. What are energy companies supposed to do? How are they supposed to invest in and build new refineries when they can’t get regulatory approval to build them? Burdensome environmental regulations and other governmental red tape issues stymie them. This is especially the case in the refining area.

So rather than actually doing something like reducing government regulations, grandstanding politicians—the same ones who have no problem signing off on $250 million Alaskan “Bridges to Nowhere”—are simply taking cheap shots at energy companies.

Once again, the GOP led Congress is departing from first principles for economic growth.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

John Kilduff, energy analyst at Fimat USA, to discuss oil and energy stocks.

Susan Kalla, telecom analyst with SG Cowen, to talk about the telecom industry.

A market discussion with Sam Lieber of Alpine Mutual Funds.

Howard Fineman, NBC news analyst, and Terry Jeffrey, editor of Human Events, in a debate/discussion on Harriet Miers' resignation, potential indictments, and the Bush administration.

Senator Jon Kyl (R-AZ) to address the budget.


TONIGHT'S POLL:

Is Harriet Miers' withdrawl a plus or minus for the Bush administration?

Plus or Minus?

Vote at www.kudlowcnbc.com.

Back Off Oil

Washington class warfare waged against Exxon Mobil and other oil companies reporting record profits is utterly incomprehensible and reveals a complete lack of economic common sense.

Senator Hillary Clinton is one member of the misguided chorus chomping at the bit and calling for tax penalties. She recently proposed a new $20 billion tax on oil companies. What she fails to recognize, or chooses to ignore, is the obvious fact that oil companies operate in a feast or famine business. While Exxon and others are certainly feasting now, it wasn’t so long ago they endured famine.

An article by Alastair J. Walling in today’s New York Sun sheds much needed light on the mistaken conclusions reached by those such as Senator Clinton. Walling writes: “The key to lower fuel prices is not to complain about oil companies' profits but to sit back and let the petrochemical giants make their money. High profits will attract investment, increase supplies, and lower prices. Threatening to make businesses give back their money is a surefire way to prevent their expansion and push gasoline prices even higher. Increasing taxes on oil companies' profits is not going to decrease gas prices or put money back in peoples' pockets.” This is just one of many clarifying and insightful comments Walling’s article addresses.

Chunks of these earnings are going to be channeled into new investments for more energy production. But, oil companies must also take care of their shareholders with dividends and buybacks.

This is called capitalism. And Washington should not meddle.

Still Duking it Out

Take a look at Ryan Sager’s editorial in today's NY Post on Congressman Mike "The Rebel" Pence's (R-IN) ongoing brawl with the pork-riddled GOP Congress.

Rep. Pence said, "I think 2006 will be the most difficult year for the Republican majority since it was minted in 1994. If those who care most about a Republican majority perceive that we are walking away from our principles, then there could be a very disappointing outcome for many members of the House and Senate come Election Day."

As Sager points out, this week's knock-down-drag-out House fight is over cutting roughly $15 billion over the next five years - one-tenth of 1 percent of projected spending over that period. (Yes, you read that right: one-tenth of 1 percent..)

For yet further evidence that the GOP Congress is tone deaf to the cries for fiscal conservatism, you can also check out The Heritage Foundation’s huge laundry list of editorial pages all across America banging the drum for an end to the profligate spending spree.

Harriet Miers Withdraws

This will be liberating for President Bush's recovery.

Now he can name a truly first-class judicial nominee.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

A market discussion with Barry James, portfolio manager at James Advantage Funds.

Richard Greenfield, cable analyst at Fulcrum Global Advisors, to talk about Cablevision and Comcast.

Bear Stearns commodities analyst Michael Dudas to discuss gold and gold stocks.

West Virginia Governor Joe Manchin (D) to talk about the coal initiative in his state.

A debate between Tom DeFrank of The Daily News and Wayne Slater of the Dallas Morning News on the specter of Libby/Rove indictments.


TONIGHT'S POLL:

Is President George W. Bush a lame duck?

Yes or No?

Vote at www.kudlowcnbc.com.

No Indictments Coming Today

Looks like we will have to continue waiting to hear from special prosecutor Fitzgerald.

No indictments or other legal action are set to be announced just yet by the federal grand jury investigating the leak.

Deregulation in Action

If you’ll recall, shortly after Katrina devastated the Gulf Coast, President Bush suspended application of the misguided 1931 Davis-Bacon Act, governing workers' pay on federal contracts in the hurricane damaged areas of Alabama, Florida, Louisiana, and Mississippi. The Davis-Bacon fossil sets a minimum pay scale for workers on federal contracts by requiring contractors to pay the prevailing or average pay in the region. Suspension of the act allowed contractors to pay lower wages in an effort to accelerate the Gulf Coast rebuilding effort.

You may also recall that Bush’s decision infuriated leading Democrats and labor leaders who wasted no time in launching broadside attacks on Bush’s decision, claiming it would lower wages. AFL-CIO President John J. Sweeney denounced Bush's announcement as "outrageous," and said that it would “exploit” workers and would “depress living standards even further."

Rep. George Miller (D-CA), the ranking Democrat on the House Committee on Education and the Workforce, accused Bush of "using the devastation of Hurricane Katrina to cut the wages of people desperately trying to rebuild their lives and their communities."

Well, it’s kind of funny, because the latest reports from the region actually show just the opposite of what the Chicken Littles feared. As it turns out, wages are actually rising, despite the deregulation, because the demand for workers has actually increased.

Makes sense doesn’t it? Allowing the market forces of supply and demand, rather than an intervention by Uncle Sam, to determine wages…

Money Tightening

Ben Bernanke or not, (and after all he won't assume office for three months), the fact remains that the Fed is likely to raise their target rate three more times. That would take it to 4.5 percent from 3.75 percent.

One key indicator is a strong gold price. Another is the three-month Treasury bill, which has moved back above the fed funds rate. Future's markets are predicting 4.5 percent.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

Michael Darda, Chief Economist, MKM Partners, and Robert McTeer, Former Dallas Federal Reserve Bank President & CEO, to talk about the Bernanke nomination.

A market discussion with Bob Millen, Jensen Portfolio Co-Portfolio Manager.

Rick Murray, Raymond James Homebuilding Analyst, on the homebuilder industry.

Cai Von Rohr, SG Cowen aerospace analyst, to talk defense stocks.


TONIGHT'S POLL:

With Ben Bernanke as Fed Chair, would you be more or less inclined to buy a home?

Vote at www.kudlowcnbc.com.

Step Up to the Plate

The White House is still nowhere to be found on the budget.

Where are John Snow and Josh Bolten? What are they doing? Where is the new list of budget cuts? Where are the rescissions? Where are the comments on pro-growth tax reform? The administration looks paralyzed, waiting for the other shoe to drop with Libby and Rove. Instead of offering direction, the players on the Bush team are still watching from the sidelines. No wonder the most recent Gallup poll shows a whopping 72 percent of Americans lacking confidence in the economy, and only 31 percent satisfied with the state of the country.

This is not the time for wallflowers.

We need leadership.

The administration needs to step up to the plate and deliver a budgetary game plan.

Tonight's Lineup

On CNBC'S "Kudlow & Company" tonight:

A Washington to Wall Street & Ben Bernanke discussion with:

Sen. Richard Shelby,Senate Banking Committee Chairman;
Wayne Angel, Former Federal Reserve Governor;
Brian Wesbury, Claymore Advisors Chief Investment Strategist;
Robert Reich, Former U.S. Labor Secretary, and
Steve Moore, WSJ Editorial Board Sr. Economics Writer.

Also, Michael Thompson of Thompson Financial Research in an earnings update.

TONIGHT'S POLL:

Is Ben Bernanke the best choice to succeed Greenspan as Fed Chairman?

Yes or No?

Vote at www.kudlowcnbc.com.

Bernanke Bullets

Some brief thoughts on the Bernanke nomination:

* Strong background -- well regarded (Ben Bernanke, Harvey Rosen and the late David Bradford were among the few non-socialists on the Princeton faculty).

* In his speech Bernanke said he’d collaborate with my colleagues at the Fed -- didn't say administration -- this guy will be independent.

* Supports inflation target.

* Should bolster with real time market price indicators.

* Nation will be leaving the Greenspan standard, warts & all.

* We need a thorough monetary policy discussion.

* The cause of inflation is excess money creation by the Fed—not rapid economic growth, nor too many people working, nor temporary oil shocks, nor hurricanes.

* Is it time to abandon the federal funds target as the fulcrum of monetary operations?

Bernanke

CEA chair and former Fed governor Ben Bernanke is about to be nominated to succeed Alan Greenspan as Chairman of the Federal Reserve Board.

In my view it is a good choice. Though Mr. Bernanke is not a hardcore advocate of the price rule, he does favor an inflation target, which is the second best option. Noteworthy is the fact that in recent speeches he has emphasized the slow and steady 2 percent zone of core inflation and inflation less energy. So he is not as militant as some of the crazed Fed presidents.

Bernanke does watch financial market indicators such as the inflation-adjusted Treasury bond and the TIPS spread.

Bernanke will also support an extension of Bush’s tax cuts for capital gains and dividends, and he has told me in the past that raising tax rates would only harm the economy.

He is widely respected in the economics profession as a former chairman of the Princeton Economics Department.

Thank heavens that Fed board member Donald Kohn, who is a demand-sider and a Phillips Curver, did not get the nod.

More coming.

White House to Name Greenspan's Successor Today

The word on the street is that Bush is going to name Ben Bernanke Greenspan's successor as Chairman of the Federal Reserve, as early as this afternoon.

GOP Litmus test

Sen. Coburn's amendments to rescind the budget pork appropriated for the Alaska "bridge to nowhere" and other items should be regarded as a litmus test for Republican candidates for president in the 2008 race.

These proliferating "earmarks" have corrupted the budget. They undermine efforts for pro-growth tax reform. They mock tax and economic freedom.

Of those senators whose names are prominently mentioned as potential 2008 candidates, those missing from a yea vote on Coburn include Bill Frist and Sam Brownback.

Those who did vote for Coburn on the GOP side include Sen. George Allen. Sen McCain voted for Coburn's first amendment, but was apparently not present for the Alaska vote.

Other possible candidates such as Gov. George Pataki,Rudy Guiliani and Gov. Mitt Romney should go on the record for or against Coburn.

GOP activists, are you watching carefully?

More on Tax Reform

A recent Bruce Bartlett column reports
on class warfare charges by the New York Times. Looking at the latest IRS data for 2003, the top 1% of income taxpayers paid 34.3% of personal receipts at the top marginal tax-rate of 35% (which went into effect in July, I believe), though they earned only 16.8% of adjusted gross income.

Inside the top 1% group, the top one-tenth (top 0.1%) paid 15.3% of income taxes. " These 129,000 tax filers earned 7.6% of the income and paid an average tax rate of 23.6%. This came to $114.6 billion -- four times more than all the taxes paid by the 64 million taxpayers in the bottom 50%-- who paid an average tax rate of 2.9%. "

Noteworthy is the fact that the top earners paid much less when the top tax-rate was 70% at the beginning of Ronald Reagan's presidency. At the end of the Carter era, the richest paid only 19.7% of taxes, and the very richest paid only 7.6%.

The Times, of course, continues to editorialize that Republican tax policy totally favors the rich.

Yet the facts speak otherwise. Lower marginal tax rates induce changes in economic behavior. These behavioral responses lead to more risktaking, more capital formation and more work. That is what the income tax payment data show. The most successful economic activists earn more and pay far more in taxes. The ladder of upward mobility is jam packed with non-rich folks who become rich.

And, according to Mr. Bartlett's research, a report from the Government Accountability Office finds deadweight loss of 2% to 5% of GDP from efficiency costs of our incredibly complex and convoluted tax system.

Pres. Reagan left us with a two-bracket system of 15% and 28%. If we took that as a starting point, and maintained a 15% rate on capgains, dividends and estates, along with unlimited universal savings accounts taxed as Roth IRAs, along with a 20% corp tax coupled by full cash expensing for capital goods investment, and territorial rather that worldwide taxation, then we'd garner so much more income growth that tax reform would more than pay for itself with close to 5% yearly GDP growth.

The Times might hate it, but everyone else who works for a living surely would love it.

Speaking of Tax Reform.........

Scott Hodge, president of the Tax Foundation, reminds us of some important factoids in a recent article.

First, tax cuts enacted under Pres. Bush substantially lowered tax burdens on the middle and lower income taxpayers. Now, 42.5 million tax filers pay no income tax.

Second, the top 20% of taxpayers--earning over $71k--pay over 80% of income taxes.

So, he asks, and I agree, why not a single rate flat tax at least for the 20% who pay most of our taxes?


The Connie Mack tax reform commission didn't get there because they were hamstrung by "static revenue" estimating formulas long favored by the Congressional tax scoring establishment.

This despite the recent Treasury budget totals for FY 2005 that showed a 32% ($78 billion) rise in tax collections for capital gains and dividends. In other words, these investment tax cuts paid for themselves. Tax something less, and you get more of it. The Laffer curve at work.

Are these merely tax cuts for the rich? And should they be repealed to reduce the Katrina deficit, as House Democrats suggest?

Well, the investor class is part of the top 20% who pay 80% of taxes in this country.$71k and up. Are they really and truly all rich people? Hardly.

Those that aren't rich, which is most of them, do in fact aspire to be rich. Or at least more well off. For their families and kids and businesses and employees, and so on.

One plus from the Connie Mack tax reform report is that it proposes to reduce the tax burden on corporate and individual capital. This is a very good thing. You can't have a new job without a business to create it. And you can't have new businesses without the capital to fund them.

Taxing capital should be eliminated altogether. This would create more businesses, jobs, income, wealth and prosperity. This is the direction of policies in the newly freed countries of Russia, the Baltics and Eastern Europe.

This is something the class warriors in the Democratic party fail to grasp.

You can't have capitalism without capital.

China's GDP

China's economy still has its pedal to the metal.

The latest numbers out show China's economy grew at a 9.4 percent clip in the third quarter, fueled once again by surging exports and continued strong investment in infrastructure.

All this and no signs of letting up.

And rather than creating runaway inflation, some economists are actually raising deflationary concerns. China's September consumer prices rose just 0.9 percent from a year earlier, compared with growth of 1.3 percent in August.

Fortunately, they are still largely tied to the dollar.

Andrew Browne over at the WSJ ran a good piece on the China story today.

Tonight's Lineup

A markets and earnings discussion with Michael Cuggino, Permanent Portfolio Family of Funds Portfolio Manager.

Tom Brown, Second Curve Capital CEO/Bankstocks.com Founder to talk about bank stocks.

A political debate focusing on the Bush administration between Julian Epstein, Democratic Strategist and Kellyanne Conway, Republican Pollster.

John Kilduff, energy analyst with FIMAT USA to address energy stocks.


TONIGHT'S POLL:

In the 2006 midterm election, will control of Congress shift from the Republicans to the Democrats?

Vote yes or no at www.kudlowcnbc.com.

Off Course

The New York Times is reporting today that special prosecutor Fitzgerald has “all but made up his mind” to seek indictments against Libby and Rove next week.

To make matters worse, the White House’s economic policy is drifting off course. The President and his staff have to absorb the potential Rove/Libby shock and keep moving ahead on various policy fronts. For example, as economic policy drifts off course, with few exceptions the Big Four Bush economic managers— Al Hubbard, John Snow, Josh Bolton and Ben Bernanke—appear to be sitting on the sidelines.

Question: Why haven’t they come out in favor of the House GOP effort to increase mandatory spending cuts and seek a three-percent across the board discretionary cut as per Marsha Blackburn and others? It would get them $500 billion or $600 billion in 10-year savings estimates. Why didn’t the White House signal help for Senator Coburn’s “Bridge to Nowhere” pork-barrel spending cut?

And why isn’t the White House beating the drum for the tax cut extensions on dividends and capital gains? The latest budget data shows that not only are these cuts are self-financing, but they create powerful growth throughout the economy. Ben Bernanke is making this point, but where are the others? And where is the President? And why aren’t they touting the numerous pro-growth recommendations in the Connie Mack tax reform commission? Mack’s group didn’t go far enough on a flat tax type proposal to reform the income tax system, but there are excellent ideas for corporate tax cuts, savings account expansion and AMT elimination.

Again, I repeat my mantra: The Bush Administration and the Republican Senate and House must return to pro-growth first principles for lower spending, lower tax burdens and energy deregulation. A campaign like this would boost the stock market and help rally the investor class.

Our poll last night on CNBC suggests that investors are deserting the GOP. The poll asked when it comes to pork spending, which party was worse. Republicans earned profligate spending honors by a margin of fourteen points, 57 percent to 43 percent. This is a bad leading indicator for the GOP in terms of next year’s mid-term election.

The Bush Republicans simply cannot afford to lose this key part of their base.

Tonight's Lineup

On CNBC'S "Kudlow & Company" tonight:

Barbara Ryan, Deutsche Bank Managing Director, to talk about Pfizer's earnings and the pharma sector.

A market discussion with Keith Wirtz, President & CIO of Fifth Third Asset Management.

Senator Tom Coburn (R-OK) to talk about his amendments to defund pork spending.

Congressman Steny Hoyer (D-MD) to discuss spending and budget cuts.

Steve Weinstein, Sr. Research Analyst at Pacific Crest Securities to address Google's earnings.


TONIGHT'S POLL:

When it comes to pork, which party is worse?

Democrats or Republicans?

Vote at www.kudlowcnbc.com.

Reality Check Needed

I can tell you right now, after having coffee with a dozen or so Republican Senators on Tuesday morning, that not only are these pork-barrel spending cuts up in the air, so are the tax cut extensions.

The Senate GOP is very much in danger of forgetting the principles that got them control of the Senate in the first place.

The Coburn Amendment

It’s official folks.

Fiscal responsibility has pork up against the ropes and is swinging away with bipartisan support.

All over the blogosphere—conservative sites and liberal too—a wave of support is gathering force behind the Coburn Amendment to put a final stop to Congressman Don Young’s infamous “Bridge to Nowhere” in Alaska. This amendment is a big deal as it threatens the opposition by opening up ALL the pork in the Highway Bill.

To refresh your memory, Congressman Young’s pork project costs $220 million for a 5.9-mile bridge connecting a tiny island with 50 residents to the Alaskan mainland, despite the fact that a ferry already exists shuttling residents back and forth every fifteen minutes or so. The cost of the bridge alone would be enough to buy every islander their own personal Lear jet.

Senator Tom Coburn’s (R-OK) amendment will transfer funding from the enormously wasteful pork project to reconstruction of the "Twin Spans" bridge in Louisiana.

As Club for Growth reports: "...the opposition is putting up a big fight. They sense this amendment, if successful, as establishing a precedent. A precedent where all pork is vulnerable and no lawmaker is safe. And they can’t allow that to happen."


Check out the stories at:

Club for Growth
The liberal blog Daily Kos
RedState.org

Tonight's Lineup

Tonight on CNBC'S "Kudlow & Company":

An earnings update with Noah Blackstein, Portfolio Manager with Dynamic Power American Growth Fund.

A View From The Hill...A Congressional debate between Rep. Marsha Blackburn (R-TN) and Rep. Xavier Becerra (D-CA).

Charlie Glavin, Semiconductor Analyst at Needham & Co., to discuss Intel's earnings.

Robin Cohen & Linda Kornfeld, authors of "Women & The Bottom Line" and managing partners at Dickstein Shapiro, on a recent study indicating women boost earnings.


TONIGHT'S POLL:

Are Intel and the other chip stocks a buy or sell?

Cast your vote at www.kudlowcnbc.com.

First Thoughts on Tax Reform

Early returns on the Tax Reform Commission from my CNBC interview with Senator Connie Mack are reasonably favorable. However, there are still many unanswered questions.

On the plus side the corporate tax-rate will drop to 32 percent from 35 percent with full cash expensing for right-offs of plant and equipment purchases. The corporate capital gains tax will be substantially reduced and perhaps eliminated altogether.

Roth IRA savings accounts provisions are much more generous without income limits. A family of four can invest $40,000 for both accounts using after-tax income with no tax thereafter.

The commission proposes to reduce the capital gains tax to slightly less than 9 percent and eliminate the tax on dividends altogether for homegrown profit-generated payouts.

On border transactions, U.S. exports will get tax cuts and U.S. imports will face tax hikes in order to equalize cross border transaction tax costs. The six bracket income tax will be reduced to four brackets, but the top rate will remain at 35 percent. The mortgage deduction will be curbed as will employer health deductions and state and local deductions.

There are a lot of pro-growth elements to this package, but I’m still parsing through all of its implications. Flat-taxers and national sales-taxers will not be happy. But it looks to me like the cost of capital will be coming down and that is definitely pro-growth.

More to come.

Tonight's Show from Washington, D.C.

Live from our nation's capital, on CNBC's "Kudlow & Company" tonight:

Former Senator Connie Mack, Chairman of the President's Advisory Panel on Tax Reform, to discuss the panel's proposals to date.

A "Washington to Wall Street" debate regarding the tax reform proposals and other related issues featuring Don Luskin, CIO of Trend Macrolytics, John Fund, WSJ columnist and Jason Furman, Senior Fellow at the Center on Budget and Policy Priorities.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

Bruce Karatz, Chairman & CEO of KB Home, to talk about the housing market and KB Home's partnership with Martha Stewart Living Omnimedia.

Rep. Jeb Hensarling (R-TX) to discuss the budget.

George Greig of William Blair International Growth Fund to address international markets.

A market discussion with David Goerz, HighMark Chief Investment Officer of Equity Management.

John Harwood, WSJ reporter, to talk about Karl Rove and Harriet Miers.


TONIGHT'S POLL:

Are you buying Martha Stewart Living Omnimedia?

Yes or no?

Cast your vote at www.kudlowcnbc.com.

Forward Equilibrium Real Interest Rate

How tight is Fed policy?

One measure is the real fed funds rate. But rather than use backward-looking CPI reports, it’s better to use forward-looking market indicators. One such measure is the real or natural interest rate for the economy as revealed by the 10-year TIPS rate. Presently that is just below 2 percent.

This is the Knut Wicksell approach updated for modern financial instruments.

The current fed funds rate is 3.75 percent. The TIPS rate is 1.93 percent. So the real fed funds rate is therefore 1.82 percent. Almost surely next month’s fed funds rate will go to 4 percent. So in effect the real fed funds rate is around 2 percent.

In 2002 the real fed funds rate was minus 119 basis points, easing to minus 89 basis points in 2003 and minus 46 basis points in 2004. So with a positive fed funds rate today that is nearing 2 percentage points, there’s been a significant tightening swing in monetary policy.

In year 2000 the forward equilibrium real funds rate was 220 basis points. In that year the Fed pursued a highly deflationary policy that doomed the stock market and decimated business investment and profits, ultimately leading to a mild recession that was actually quite severe in the business sector.

That the real equilibrium funds rate today is approaching year 2000 levels is not reassuring. Should the Fed keep marching toward a higher target rate, it will certainly undermine stocks, business, and the economy.

Spending Cuts

Check out the Washington Post story on House GOP lawmakers set to cut spending.

It’s a $50 billion dollar spending cut proposal that will generate big savings in the out years.

Good. Good. Good.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

Jim Glassman, Senior U.S. Economist at JP Morgan to talk about today's economic releases.

Charles Gasparino, Newsweek Sr. Business Writer and "Blood on the Street" author to provide an update on the Refco scandal.

Mike Holland, Chairman of Holland & Company, and Michael Chren, Portfolio Manager of Allegiant Large Cap Value Fund in a market discussion.

Lawrence Hunter, Free Enterprise Fund Chief Economist and Alan Auerbach, Professor of Economics & Law at UC Berkeley in a tax reform debate.


TONIGHT'S POLL:

Would you trade off a limited mortgage deduction for a significantly lower income tax rate?

Yes or no?

Cast your vote at www.kudlowcnbc.com.

Irresponsible Fed

There's a lot of important economic news today but the biggest stat is the core CPI which came in below expectations at only 0.1% or 2.0% over the past 12 months.

An even better measure of inflation, is the so-called chained, or Boskin CPI, whose core reading was only 1.8% over the past 12 months.

This is exactly the reverse of what Richard Fisher and other yapping Fed presidents, with their irresponsible and misleading, alarmist, inflation rhetoric that has so upset the recent stock market.

These officials are actually missing a clear trend. Namely: that after the core CPI rose modestly in 2003 and the first half of 2004, over the past 11 months, that core inflation measure is actually declining, modestly, not rising to new highs.

So I'd like to see a little more responsibility from these Fed people, instead of their glib alarmism.

The Sun Will Shine Again

The rain has been pouring down here in New York. In Central Park, over eleven inches have fallen, making this one of the wettest Octobers on record.

The rain is not the only thing coming down.

Pick up any newspaper and it looks like the sky is falling too. One story after another is painting a gloomy picture right now. People are spooked. Exaggerated inflationary fears, surging energy prices, the Refco scandal, along with heightened speculation that the housing boom is nearing an end, are all roiling the markets these days.

It was just a few weeks ago that the markets looked confident, poised to break out of its resistance levels. Now it’s breaking through key support levels and gold is chasing 20-years highs.

The news out of Washington doesn’t look much better.

House Majority Leader Tom DeLay is battling for his political life against an overzealous prosecutor. Senate Majority Leader Bill Frist has been subpoenaed to turn over records amidst allegations of insider trading involving the sale of his HCA stock. The President’s top advisor, Karl Rove, has appeared before a federal grand jury four times, and awaits a decision from prosecutors whether he will be indicted over leaking a covert CIA operative's name. And don’t forget about two hurricanes and the war in Iraq.

And then, as if we needed anything else to worry about, here comes the avian bird flu story—fears of a worldwide pandemic stealing millions of lives.

Can it get much worse?

I think we all need to take a deep breath.

We Americans are a tough bunch. We have dealt with adversity before. And we will deal with it again. But right now, I think cooler heads need to prevail.

The market will jump back. Maybe not tomorrow, maybe not next month, maybe not even next quarter. But the market will come back.

Our resilient free-market capitalist economy continues to be the envy of all our neighbors. We have the greatest workers and the greatest companies in the world. The formidable combination of low tax-rates on capital, deregulation, strong productivity, Schumpeterian “gales of creative destruction” spawned by bold entrepreneurs who continue to reshape our prosperity, along with record wealth creation and low unemployment, have all conspired to turn the U.S. into the single greatest economy in the world.

I think it might be time to revisit Ronald Reagan’s parting words in his farewell speech to our nation. A speech in which he articulated a vision of America brimming with confidence and possibility. The same man who so brilliantly guided our nation out from a stubborn cloud of malaise that had left us paralyzed and weak.

“And that's about all I have to say tonight,” Reagan said. “Except for one thing. The past few days when I've been at that window upstairs, I've thought a bit of the `shining city upon a hill.' The phrase comes from John Winthrop, who wrote it to describe the America he imagined. What he imagined was important because he was an early Pilgrim, an early freedom man. He journeyed here on what today we'd call a little wooden boat; and like the other Pilgrims, he was looking for a home that would be free. I've spoken of the shining city all my political life, but I don't know if I ever quite communicated what I saw when I said it. But in my mind it was a tall, proud city built on rocks stronger than oceans, windswept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity. And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. That's how I saw it, and see it still.


We need to take a deep breath, and remember:

The shining city will weather these storms.

The rain will cease.

And the sun will shine again.

Hoffmeister-Wesbury Monetary Debate

On CNBC's "Kudlow & Company" last night, we had a monetary debate between Paul Hoffmeister, director of market strategy at Jude Wanniski's Polyconomics, and Brian Wesbury, chief investment strategist at Claymore Securites.

Paul made an interesting argument, which is detailed in his client letter below:



I am grateful to Larry Kudlow for inviting me onto his show yesterday to promote Polyconomics' argument against current Fed policy.

My main argument in the debate with Brian Wesbury was that the Fed must cut interest rates in order to reinvigorate growth and spur production. By doing so, the increased economic activity would soak up the excess liquidity in the economy. Of course, this argument is made within the context of the Fed's inflation-targeting mechanism, an imperfect monetary lever.

As Larry pointed out, in a perfect world, the Fed would abandon its interest-rate targeting mechanism and simply sell bonds until the gold price fell to an appropriate level. This change in monetary policy would effectively tie the dollar to gold again. This point is extremely important. The current debate over interest rate policy is flawed from the start because the argument is over a flawed monetary
lever. Interest-rate targeting will never stabilize the dollar as effectively as buying and selling bonds based on the gold signal.

As I mentioned in the show, President Bush has an historic opportunity to do for monetary policy what President Reagan did for fiscal policy. As President Bush considers candidates to succeed Alan Greenspan, it may be misleading for financial pundits to argue about interest-rate policy. They should instead be screaming about the chaos created by interest-rate targeting and the floating dollar, and rally the country for a new Fed Chairman who believes in targeting gold.

Yesterday was the first time I met Larry. Given our conversations on and off the air, I am convinced that Larry is, with his bully pulpit, the champion at the margin for classical, supply-side economics at this most critical time.

Paul Hoffmeister

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

A market discussion with Barry James, Portfolio Manager of James Advantage Funds and Dan Boone, Portfolio Manager of Calvert Social Equity Fund.

Riad Younes of Julius Baer International Equity Fund to discuss the international markets.

Charles Gasparino, Sr. Writer at Newsweek and author of "Blood on the Street" to address the Refco scandal.

Fmr. Reagan Economic Advisor John Rutledge to debate Washington policy and the economy with Bruce Bartlett, Senior Fellow from the National Center for Policy Analysis and author of "Imposter."


TONIGHT'S POLL:

Are you buying gold stocks?

Yes or no?

Cast your vote at www.kudlowcnbc.com.

Two Good Stories

There were two good articles in today’s Investor’s Business Daily that deserve a read.

One was an editorial bemoaning the “unrealistic half-measures” the president’s tax reform panel has proposed. Simplifying the tax code and broadening the income tax base is fine. The mortgage interest deduction and other tax exemptions are worth much less at lower income tax rates, and the economic growth from a tax rate somewhere in the 20 percent range will more than fill in revenue to keep the reform plan revenue neutral.

The question remaining is will there be significant flattening of the tax rate system. If there is, scrapping the mortgage interest deduction makes sense. If there isn’t a flattening, it does not make sense.

The other IBD story addresses the havoc the avian bird flu could cause businesses. I'm getting bored with bird flu catastrophe stories. We have the anti-virals. Won't medical science come up with vaccines? Pessimists are running wild with H5N1.

Greenspan's Successor

Financial markets and the economy have prospered mightily during the 18-year tenure of Fed Chairman Alan Greenspan, who has operated successfully with a free market supply side economic growth model that recognizes that excess money causes inflation and low tax rates promote growth. Plus he is a staunch free-trader.

Now, there is a list of current and former Bush economists that has occupied most of the speculation on Mr. Greenspan's successor.

Two fed names are very much in the running: Roger Ferguson and Donald Kohn. Both are well-credentialed and skilled professionals. But my fear is that they do not share the maestro's model. I worry that they believe in the so-called Phillips curve, which stipulates a false trade-off between lower unemployment and rising inflation. In this view, rapid economic growth must be stopped by the central bank in order to curb inflation. Too many people working are somehow inflationary.

Additionally, I worry that Mr. Ferguson and Mr. Kohn prefer to raise tax rates rather than reduce them.

And this would undermine economic growth incentives to the detriment of jobs, stock markets, and overall prosperity.

My view here is not factual but opinion. I don't know the President's mind but I am hearing these names more and more. It is my great hope that Mr. Bush will choose the best person with the free market supply side model that has governed our economy so successfully, really over the past 25 years, ever since Ronald Reagan first launched it.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

An economic policy debate between Paul Hoffmeister, Director of Market Strategy at Polyconomics and Brian Wesbury, Chief Investment Strategist at Claymore Securities.

A political debate between Tony Blankley, Washington Times editorial page editor and Jim Warren, Deputy Managing Editor at the Chicago Tribune.

Pat Davies, Sasol CEO, to address the conversion of coal to synthetic fuel.

William Fearnley, FTN Midwest Securities PC & Enterprise Hardware Analyst to talk about Apple/Dell/Hewlett Packard.


TONIGHT'S POLL:

Will a "Rove-less" White House cause political and policy chaos?

Yes or No?

Cast your vote at www.kudlowcnbc.com.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

Micheline Maynard, NY Times Business Reporter, to discuss GM and the auto industry.

David Malpass, Bear Stearns Chief Economist and Roger Kubarych, HVB Group Sr. Economic Advisor to address the Fed, the economy and the German coalition.

John Barry, author of "The Great Influenza" to talk about Avian Bird Flu.

Hal Vogel, Vogel Capital Management CEO & Independant Media Analyst to discuss AOL/Time Warner.

Jim Goldman, CNBC reporter, to report on Apple's earnings.


TONIGHT'S POLL:

Can a healthy U.S. economy survive without General Motors?

Yes?
No?

Cast your vote at www.kudlowcnbc.com.

Fisher's Flip-Flops

We have commented recently on Dallas Fed President Richard Fisher, who has been roiling markets with his alarmist inflationary rhetoric. What is interesting and unusual about Mr. Fisher’s background as a Federal Reserve Bank president is his considerable exposure and experience within the political arena. In 1994, Fisher ran an unsuccessful U.S. Senate campaign against current Texas Senator Kay Bailey Hutchison where she won 61% of the vote.

The Dallas Morning News and The Houston Chronicle both ran two rather interesting articles during Fisher’s campaign that questioned his apparent flip-flops on a number of issues. The Houston piece referred to Fisher’s vocal opposition to “special interest” money and career politicians, despite his long history of contributing thousands of dollars to career politicians including $10,000 to the Democratic party, and a $1000 gift to a Dallas PAC supporting Michael Dukakis’ failed presidential bid.

The Dallas Morning News story addressed a Fisher campaign brochure that referred several times to Fisher’s desire to help then President Clinton. The pamphlet’s cover featured a picture of Clinton and Fisher smiling and standing together at the White House. Yet Fisher, who played an instrumental role as a senior adviser in Ross Perot’s failed presidential campaign against Clinton, refused to say whom he supported for president that year, saying "I just don't think it's appropriate."

The article also mentioned a Fisher quote to another Dallas newspaper where he said his presidential voting record was “Carter, Reagan, Bush, Perot.” He later denied ever making the quote, despite the reporter’s insistence that he had. “I’ve never voted for a Republican for President,” Fisher later said.

Corporate Capital Gains Tax

I am hoping that President Bush’s Tax Reform Commission, headed by former Senators Connie Mack and John Breaux, comes up with thorough reform of burdensome corporate taxes.

The 35% U.S. corporate tax rate is higher than almost all the European rates. So is the 35% corporate capital gains tax, which is stopping many transactions and unrealized gains from ever being unlocked. It is also preventing the reinvestment of gains into new ventures that would grow the economy and create jobs.

Sources tell me Warren Buffett has unrealized gains of $35 to $40 billion worth that could be reinvested.

I think this corporate capital gains tax should be cut to 15%, or better yet, eliminated altogether.

I'll bet a corporate cap gains tax cut would pay for itself just as the individual cap gains tax cuts have been self-financing. It would certainly spur growth. It would reward investors. And it would reinvigorate the economy's creative juices.

Hopefully the tax reform commission will not forget the corporate capital gains tax.

That's my take…

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

Robert Reich, Former Labor Secretary and Steve Moore, WSJ Editorial Board Sr. Economics Writer, to talk about tax policy, budget, the Fed and the Miers nomination.

Christopher Edmonds, Managing Director of Research at Pritchard Capital Partners, and Fadel Gheit, Sr. Energy Analyst at Oppenheimer, to discuss the oil and gas industry.

Ivan Feinseth, Matrix USA analyst to address utilities.


TONIGHT'S POLL:

Is the budget after Hurricane Katrina going to be big trouble for the Republican Party, or will they make the tough cuts?

Crackup?
Regroup?

Cast your vote at www.kudlowcnbc.com.

Purchase Treasury Securities Online

As money manager Mike Holland mentioned on Friday’s show, Uncle Sam is now offering one-stop shopping for all of its Treasury securities through its TreasuryDirect website.

Bills, Notes, and Treasury Inflation-Protected Security (TIPS) have been added to the product line-up and are available, along with Series EE and I savings bonds, to purchase and hold in a TreasuryDirect account. If you sign up for an account, you can purchase, transfer, and receive payments for your Treasury securities completely online, with no paper statements to maintain and, best of all, with no fees.

Beginning with the October 3, 2005, auction of 13 and 26-month Treasury bills, online account holders can now submit noncompetitive bids to purchase marketable Treasury securities. For the first time, account holders are now able to purchase and hold savings bonds and marketable securities in a single online account, providing 24/7 convenience for tracking and managing all Treasury consumer securities.

A New Speechwriter?

Dallas Fed President Richard Fisher has badly roiled stock markets recently with his alarmist speeches about "inflation viruses infecting the blood supply."

Let me suggest to my old free market and free trade friend Richard Fisher—who is a capitalist and actually had a pretty good speech, but for a few badly turned phrases—that it's time to get a new speech writer.

Mr. Fisher said that core inflation is edging closer to the upper end of the Fed's tolerance zone, with little inclination to go in the other direction.

In fact, over the past 12 months the Fed’s preferred core consumer spending deflator has increased only 2%, actually lower than its 2.3% rate last November, which is 10 months ago. Their range is 1.5 to 2.5%, so they have done a good job. And it's possible core prices are heading back down after 15 months of tightening.

While the rise in gold prices is troubling, the yield curve has flattened, the dollar is strengthening, bond rates are historically low, and the T-bill is well below the Fed funds rate.

So the weight to the forward-looking inflation evidence, as well as the core consumer deflator, suggests that the central bank has done enough and should take a well-earned vacation from future tightening moves.

Finally, I trust my friend Richard Fisher will in fact, get a new speechwriter...markets will love that.