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Posted 12/31/2003
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11 bold predictions for the year ahead
We read the tea leaves for a look back at the year to come: Bin Ladens capture, Bushs resounding, tax-cut-inspired victory and 9 other portfolio-benders.
By Jon D. Markman
In an amazing stroke of luck, Santa left a crystal ball under the tree for me last week. Despite trepidation at foreseeing the future, I felt obligated to take a peek and provide readers with a list of 11 surprises for the coming year.
Osama bin Laden is captured on Oct. 15 by U.S. Green Berets in an Iranian desert cave, outfitted with French kidney dialysis equipment and tended by Russian doctors. The discovery energizes President Bushs already surging campaign for re-election and pushes the Dow Jones Industrial Average ($INDU) above 12,750 for the first time. Democrats cry foul, complaining that the administration had pinned the al-Qaeda executive months before and saved his capture for a rainy day. Yet their peacenik candidate loses his key foreign-policy rhetorical plank and goes down to a landslide defeat that eclipses past losses by McGovern and Dukakis.
U.S. job growth stages a remarkable comeback on the strength of the Iraq rebuilding effort. Employment at Rust Belt steel makers, ore processors, mineral miners, sawmills, machinery makers and oilfield-equipment makers surges as the Bush administration puts tens of billions of taxpayer dollars to work in hammering, nailing and soldering the industrial and social infrastructure of the once-prodigious oil exporter back together. By the middle of the spring, the U.S. economy is adding more than 200,000 new jobs per month, and factory-capacity utilization hits a three-year high. Boosting manufacturing is a little-heralded clause of the 2003 tax cuts that allows accelerated amortization of capital-equipment purchases in this year, and businesses ramp up their purchase of all kinds of machinery, from computers and optical switches to looms and backhoes.
Congress makes the 2003 tax cuts permanent, frustrating financial bears who complained that this years fiscal stimulus was a one-time hit of methamphetamine for the U.S. economy and would not be repeated in the future. The most controversial clause of the 2004 tax bill -- permanent elimination of the estate and dividend taxes -- provides a rallying cry for Democrats that the GOP is only out for the rich. The Democratic presidential candidate tries to run on a promise to repeal the tax cuts, only to find polls show voters for some reason like paying lower taxes.
Oil soars over $35 a barrel and remains there for more than 45 days in June and July after King Fahd, longtime leader of Saudi Arabia, dies and his heirs fail to decide quickly on a new leader. The world learns that Fahd has numerous full brothers, half-brothers and sons with competing claims to the throne.
Half-brother Prince Abdullah bin Abdul Aziz Al Saud, long expected to take King Fahds place, decides that both he and full-brother Prince Sultan bin Abdul Aziz Al Saud are too old for the job and sidesteps the line of succession by naming one of his own sons to lead the country. Fahd full-brother Prince Sultan, commander of the 100,000-man Saudi armed forces, objects -- and has his men attack Abdullahs 60,000-man national guard. Another full brother, Prince Nayef, the current minister of the interior who wields tremendous power within Islam as head of the Supreme Committee of the Hajj, attempts to broker a compromise and is assassinated.
As the world looks on with horror, full-brother Prince Salman, 67, head of the Saudi intelligence forces and the closest to Wahabbi fundamentalists, emerges as the apparent winner of the power struggle and, in one of his first official acts, closes American military bases in the kingdom. U.S. equities swoon by 15% as investors fear higher energy prices and political turmoil will kill the broadening global economic recovery. Order is restored when President Bush sends in warplanes to back Prince Abdullahs side, and both Sultan and Salmans forces are crushed. Oil prices return to the $25 range by late August, and the U.S. armed forces are able to retreat to their Riyadh barracks by the fall.
Investing outlook for 2004
The Federal Reserve keeps interest rates at 45-year lows through all of 2004, despite the rise in jobs and the strengthening economy. Stocks decline in November as investors are certain of a rate hike in December, but the monetary-policy leaders remain on hold by claiming the recovery is still tenuous and by noting a continued lack of inflationary pressure.
Gold prices plunge from the $485 level back to the $375 area in the late spring as central banks around the world flood the market with supply at those prices. Analysts declare that the selling has popped a metals bubble. Stocks of tiny gold and silver miners, which had emerged from under $1 to the $5-$10 range, collapse by 50% in a run for the exits. But just as the decline gets out of hand, the Saudi crisis emerges and metals prices stabilize. This turns out to be the best long-term opportunity to buy into the gold and silver rally since late 2002, and the yellow metal ends the year at $510.
Government corruption emerges as the next phase of the mutual fund scandal, as prosecutors allege that four midlevel bureaucrats at federal regulatory agencies were criminally complicit in the market-timing and late-trading scandals that rocked the industry in 2003. Plea bargain agreements show the regulators were offered high-level jobs at mutual funds upon their exit from government and were wined and dined in the Caribbean and Aspen, Colo., in return for their agreements to tacitly sanction the behavior.
Standard & Poors boots out four constituents of its flagship S&P 500 Index ($INX), and they go on to record an average 35% gain for the year. The gatekeeper for the index that is tracked by more than $1 trillion in funds kicks out spice maker McCormick (MKC, news, msgs), chip maker Power-One (PWER, news, msgs), steel maker Allegheny Technologies (ATI, news, msgs) and housewares maker Tupperware (TUP, news, msgs) due to their low, sub-$1 billion market capitalizations and diminishing representation of their industries. Showing no remorse for their disastrous 2002 decisions to kick McDermott International (MDR, news, msgs) out of the index at $4.50 in August 2003 (it closed the year at around $12) and to kick AMR Corp. (AMR, news, msgs) out of the index at $1.50 in March (it closed the year around $13), the indexers add high-flying Web retailers Amazon.com (AMZN, news, msgs) and InterActive (IACI, news, msgs), biotech Gilead Sciences (GILD, news, msgs) and home builder Lennar (LEN, news, msgs). The new stocks decline 15% on average in 2004.
Small-cap oil and gas drillers become the hot sector for momentum traders in the first three quarters of the year. The move is driven in part by higher demand from the strengthening economy, but its exacerbated by heavy merger activity that puts a rising bid under the stocks. Shares of microcap wildcatters such as TransGlobe Energy (TGA, news, msgs), Toreador Resources (TRGL, news, msgs) and Abraxas Petroleum (ABP, news, msgs) and small oil services providers such as OMNI Energy Services (OMNI, news, msgs) double and triple in price.
Rich-content Internet advertising emerges as the hot tech trend of the year, attracting scads of venture capital to startups and momentum money to current public plays. Doubleclick (DCLK, news, msgs), the doyen of the group, advances 50% during the year but finds itself eclipsed by specialist direct and interactive marketers Modem Media (MMPT, news, msgs), Traffix (TRFX, news, msgs) and aQuantive (AQNT, news, msgs), as well as by the initial public offering of the new Web advertising leader, Google. International broadband Internet suppliers such as NTL (NTLI, news, msgs) and UnitedGlobalCom (UCOMA, news, msgs) are seen as ways to play the trend, as their high-speed networks provide the platform for improved product sales.
Chile, Brazil, Peru, Mexico and Argentina become more widely recognized for their improved domestic economies, strong commodity exports and safe havens for tourism. Despite bears projections of major trouble because of high consumer and corporate debt and income disparities, their stock markets surge to new highs by the end of the year.
Ill monitor these projected surprises throughout 2004, and let you know whether Santas gift of future-sight was crystal or cloudy.
Oh and one other thing. Last years forecast at this time from Mr. P, an anonymous hedge fund manager who provides us with guidance from time to time, was pretty accurate. (He forecast a 10% gain in the stock market, the Fed on hold all year and rising commodity prices.) Heres his view for 2004: I believe the market is fully priced and that returns going forward will be dull, with low volatility, in the 5%-to-8% range. Current low volatility implies unrealistic expectation of a low-risk geopolitical environment. Returns for investors will come from buying sell-offs during periodic high-volatility events associated with terrorism risk, large European bankruptcies and big moves in currencies and commodities. The trend will be flat to up, however, as the Fed will continue to provide liquidity through low interest rates. In the fall, if it appears that Bush will achieve a supermajority in Congress to pass his political, financial and social agenda, then the market will be primed to soar in the fourth quarter and in 2005.
Fine Print
Learn all about King Fahd at his very own Web site, www.kingfahdbinabdulaziz.com. . . . All the microcap oil companies have pretty good Web sites where you can read their 10k regulatory documents to learn more about their projects. Heres the link for TransGlobe, which has a stake in major projects in Yemen. . . . Standard & Poors announces changes to its indexes at its Web site. . . . Two stocks S&P kicked out of its S&P Smallcap 600 portfolio in August, Infocus (INFS, news, msgs) and AK Steel (AKS, news, msgs), have recorded 100%-plus gains since. . . . A good source for Latin American economic news in English is LatinFocus.com. Its free newsletter, available here, is very useful.
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 jdm@oddpost.com. At the time of publication, Markman controlled accounts with positions in the following securities mentioned in this column: UnitedGlobalCom (UCOMA).
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