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My 12 big surprises for 2005
My predictions for the headlines that will dominate 2005? Apple sells out; crude oil hits $75; Hewlett-Packard ousts Carly Fiorina; and the Fed does little to boost interest rates.
By Jon D. Markman
The next year stretches out in front of us like a nighttime road in an exotic country, beautiful and strange, yet not entirely unknowable. It is a lot like every other place weve been, complete with mysteries both opaque and predictable.
At the end of December every year, I attempt to view this land through the prism of the past -- yet with eyes wide open for unexpected vistas. Im peering into the dark for surprises and attempting to see around corners to find twists that might throw investors off track, as well as shortcuts that could make us a few bucks.
Much of what will happen in 2005 will be a continuation of trends in 2004. But new trends will develop as well, sometimes as bizarre, misshapen progeny of the old.
Before venturing forth, lets consider briefly how well I did in 2004 with my 11 bold predictions for the year ahead. They weren't too bad. I got approximately 5.5 correct out of those 11. My misplaced forecasts were mostly political and economic; my stock ideas were largely on target.- Misses: Bin Laden was not conveniently captured just before the November election; job growth did stage a comeback -- but then faded; Congress did not make the 2003 tax cuts permanent; the Federal Reserve did not keep interest rates at 45-year lows all year; government corruption did not emerge as the next wave of the mutual fund scandal; and rich-content Internet advertising did not emerge as a hot tech trend.
- Hits: Crude oil soared over $35 a barrel and stayed there; the price of gold did fade back to the $375-an-ounce area ($371 to be exact) before moving much higher; stocks that Standard & Poor's removed from the Standard & Poors 500 Index ($INX) did better than the index; small oil and gas drillers were the hot sectors for momentum traders in the first three quarters of the year; the economies and stock markets of Chile, Brazil, Peru, Mexico and Argentina all surged to new highs; and Mr. P, research director of a major East Coast hedge fund who has been highly accurate on tips in the last few years, was dead on with his prediction of a 5%-to-8% advance in the S&P 500, concluding with a strong fourth quarter and big swings in commodity prices.
Free to be themselves?
To be a bit more specific on the hits, the S&P removed Tupperware (TUP, news, msgs), Thomas & Betts (TNB, news, msgs), American Greetings (AM, news, msgs) and Winn-Dixie Stores (WIN, news, msgs) during the year for reasons other than mergers. Their performances post-exit were a poke in the eye to the S&P mandarins, as it was uniformly excellent.
| S&P 500 discards vs. the S&P 500 | | Company | Exit date | % change. from exit to Dec. 18 | S&P change from exit to Dec. 18 | | Tupperware (TUP, news, msgs) | March 16 | 19% | 8% | | American Greetings (AM, news, msgs) | April 30 | 34% | 9% | | Thomas & Betts (TNB, news, msgs) | Aug. 2 | 20% | 8% | | Winn-Dixie Stores (WIN, news, msgs) | Dec. 2 | 10% | 0% |
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Data through Dec. 18.
And my 2004 small-cap energy and emerging markets picks were also largely on track:
| Big gains in small-cap energy and emerging markets | | Pick | % gain | | Small-cap energy stocks | | | TransGlobe Energy (TGA, news, msgs) | 107% | | Toreador Resources (TRGL, news, msgs) | 330% | | Abraxas Petroleum (ABP, news, msgs) | 101% | | OMNI Energy Services (OMNI, news, msgs) | -60% | | Country funds | | | Chile Fund (CH, news, msgs) | 61% | | iShares MSCI-Mexico (EWW, news, msgs) | 41% | | iShares MSCI-Brazil (EWZ, news, msgs) | 28% | | Brazil Fund (BZF, news, msgs) | 40% |
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Data through Dec. 18.
Now, on to 2005
The great atomic physicist Niels Bohr is reputed to have said, Prediction is very difficult, especially of the future. He was Danish, so maybe something was lost in the translation. Nevertheless, on that note, we move on to my surprises of 2005:
- Sirius Satellite Radio (SIRI, news, msgs) does another secondary to raise $250 million and offers the bulk of it to outgoing Secretary of Defense Donald Rumsfeld for a seven-year broadcasting deal. In a press release, Sirius management says it believes the devotion of Rummys global audience will translate into millions of subscriptions. Sirius stock soars on the news.
- Apple Computer (AAPL, news, msgs) releases two new handheld devices in an attempt to follow up its iPod mega-hit, but they fail to gain traction. iPods begin stacking up at electronics stores when it is discovered that, after a Christmas-buying frenzy, there are now 2.7 iPods for every American over the age of 6. . . . Apple turns to Philips Electronics (PHG, news, msgs) for a bailout and is sold to the Netherlands-based consumer electronics giant for $80 a share. (Thats about $15 when converted into euros.)
- $40 is the new $25 for the per-barrel price of crude oil, as energy demands from emerging markets and constrained supply put a new floor on the commodity. Although economic growth is sluggish during the year, various supply scares push the price to spikes as high as $75. Small energy producers such as Goodrich Petroleum (GDP, news, msgs) and Harvest Natural Resources (HNR, news, msgs) continue to run.
- China manages to effectively clamp down on industrial production, pushing its annualized growth rate below 7%. This chokehold on the construction of power plants and industrial facilities stymies the advance of basic building materials, such as steel. Yet Chinas multiyear drought continues to constrict its ability to grow food, and commodities such as fertilizer and soybeans continue to rise on world markets as farmers in Brazil, Argentina and the United States work overtime to take up the slack. Ammonia producer Terra Industries (TRA, news, msgs) soars past its all-time high of $15, set in 1996, by midyear. Potash Corp. of Saskatchewan (POT, news, msgs), which set its own all-time high in mid-2004, climbs another 50% by midyear and announces a 3-for-1 stock split. Mosaic (MOS, news, msgs), the combination of the old IMC Global and Cargill Fertilizer, doubles by the end of the year. Monsanto (MON, news, msgs), which quadrupled from its 2003 low through the end of 2004, rises another 60% in 2005.
- Chinas got to eat amid an economic slowdown, and Chinas also got to turn on the lights. Word out of Beijing over the weekend suggested that its mandarins are forcing local governments to stop building power plants. But the current ones are barely able to keep the factories, televisions and streetlamps humming. To feed the plants hunger for fuel, U.S., Chinese, Korean and Australian coal miners continue to perform well, as do the makers of copper due to its use in electricity distribution. Continuing their two-year rallies are BHP Billiton (BHP, news, msgs) and Peabody Energy (BTU, news, msgs), and recent initial public offering Foundation Coal (FCL, news, msgs) doubles by year end. Miners Phelps Dodge (PD, news, msgs) and Southern Peru Copper (PCU, news, msgs) also advance another 40% past their lofty 2004 highs by year end.
- Fiber to the premises finally takes off as an investment theme, as Baby Bells like Verizon Communications (VZ, news, msgs) and SBC Communications (SBC, news, msgs) spend like drunken sailors in an effort to bring fiber-optic broadband speed to their residential customers. Street-diggers like MasTec (MTZ, news, msgs) and Dycom Industries (DY, news, msgs) led the way in 2004, and they are followed in 2005 by fiber-optic component makers JDS Uniphase (JDSU, news, msgs), Avanex (AVNX, news, msgs) and Bookham (BKHM, news, msgs), all of which double and more amid rising sales, earnings and stock-momentum buzz.
- The hit retail phenomenon of the year is Build-a-Bear Workshop (BBW, news, msgs), which went public at $20 in November and rises to $60 by the end of 2005. The teddy-bear customization chain rides a wave of new popularity after it introduces iBear -- a stuffed animal with built-in satellite radio, MP3 player, cell phone and digital camera.
- By the end of the year, a study reports that the United States is experiencing a creativity crisis spawned by the intense focus on homeland security. Researchers discover that a clampdown on immigration is keeping out foreigners who see old things in new ways. Jim Williams, of the Williams Inference Center, is quoted in the paper as stating that immigrants like Albert Einstein and Intel founder Andy Grove bail us out in hard times. He adds: If immigration continues to decline, we arent going to come back the way we have for a century. We cant trade protection for imagination.
- Federal Reserve interest-rate hikes halt in February and are not resumed until late summer as policymakers become more data dependent. The economy disappoints, with less than 2.5% annualized growth, but stocks begin to discount a stronger recovery in 2006, and the S&P 500 defies skeptics to end the year up 15%. Moderately low rates allow the housing bubble to continue to inflate, and companies like Orleans Homebuilders (OHB, news, msgs), William Lyon Homes (WLS, news, msgs), KB Homes (KBH, news, msgs) and Toll Brothers (TOL, news, msgs) continue their multi-year march on aggravated short-sellers for most of the year.
- After a year on the outs with investors, generic drug makers stage a stunning comeback. The catalyst is a growing belief among traditional Big Pharma investors that Merck (MRK, news, msgs) and Pfizer (PFE, news, msgs) really are down for the count and wont come back without hooking up with innovative small drug and generic drug manufacturers. Companies like Par Pharmaceuticals (PRX, news, msgs) and Barr Pharmaceuticals (BRL, news, msgs) advance 50% by the end of 2005 as they catch a whiff of their old speculative fever.
- Congress repeals sections of the Sarbanes-Oxley Act of 2002 as companies persuasively complain that they are spending more on nickel-and-dime securities compliance than on research and development.
- The Hewlett-Packard (HPQ, news, msgs) board ousts Chief Executive Carly Fiorina and replaces her with a former top executive at Dell (DELL, news, msgs). The new management team pares down the production and distribution infrastructure, revamps sales and marketing and produces a comeback in just six quarters. Growing acknowledgment that the change is working catches investors by surprise, but the stock ultimately becomes a leading name in the Dow Jones industrials ($INDU) for 2005.
Of course the biggest, and most important, surprises are the hardest to see from the vantage point of a single observer. So let me know what you think the biggest surprises of 2005 will be. E-mail me at jon.markman@gmail.com, put SURPRISE in the subject field, and Ill compile the most creative and provocative reader ideas into a column in late January.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication he held positions in the following stocks mentioned: Terra Industries.
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