"10 surprises to stretch your thinking"

[jean]

This is a public information ad featured on the inside back cover of this week’s Newsweek (Kerry cover). I have bolded a few items.

(The whole report is here:10 surprises )


“2004 through the looking glass.
10 surprises to stretch your thinking.

I believe it is useful to start the year reflecting on how some of the key investment issues might be resolved in ways that are different from expectations. The challenge is to choose whether reality will be better or worse than the consensus. Here are my picks for the Ten Surprises of 2004.

1. The prolonged covert effort to find Osama bin Laden
finally pays off. He is captured while changing caves along
the Pakistan-Afghanistan border in a complex ambush involving
mountain-climbing ground troops and helicopters.
Intelligence following the capture shows Al Qaeda in a state
of financial distress and disorganization. There is no major
casualty-producing terrorist attack in the U.S. in 2004.

2. In spite of a strong economy, the Federal Reserve does
not increase short-term interest rates at all during the year.
Although commodity prices continue to rise, productivity
continues to improve and inflation stays benign as it did in
2003. Real intermediate-term yields remain sufficient to
attract investors. The 10-year U.S. Treasury yield stays
below 5%.

3. The U.S. equity market continues its strong performance.
The Standard & Poor’s 500 rises to 1300, or 17%.
More companies recognize stock options as a compensation
expense and take charges to fund their pension liabilities, but
S&P 500 earnings still exceed $64. Global investors are
again reminded of America’s unique resilience. In spite of
the twin deficits and geopolitical turmoil, the bull charges on.
The bears cry “Bubble Redux.”

4. Questionable practices in the mutual fund industry drop
out of the news. Fund families impose tougher compliance
restrictions, and trustees increase their surveillance of fund
performance and procedures. The combination of a strong
equity market and improved controls encourages investors to
buy fund management company shares with enthusiasm.
Alliance Capital, Marsh & McLennan, and Federated Investors
show exceptional performance.

5. The Stability and Growth Pact proves to be too much for
Germany and France. They remain in the European Union
but argue that even more flexibility is necessary. Critics
wonder whether the European Union is unraveling. Because
of this and somewhat higher interest rates in the U.S., the
euro/dollar weakens to 1.05, disappointing the many bears on
the U.S. currency. Total returns to European investors in the
United States stock and bond markets are dramatic.


6. Pharmaceuticals and other large-capitalization,
higher-quality companies begin to outperform the market.
Both presidential candidates proclaim the importance of new
drug innovation in holding down escalating overall healthcare
costs and argue that companies should be rewarded for
their costly research. Pfizer, Wyeth, and even Bristol-Myers
Squibb outperform. High-quality multinationals also regain
investor favor. General Electric, Microsoft, Honeywell,
Coca-Cola, and Altria become market leaders.


7.Political conditions in Saudi Arabia deteriorate, endangering
the monarchy there. Radical Islamists increase
their popular support and crude production is reduced. The
price of oil moves above $40 and ConocoPhilips and BP are
big-cap outperformers.

8. In spite of favorable financial markets, an increasing
number of investors begin to question the soundness of
stocks, bonds, and currency. Silver becomes the precious
metal of choice. While gold ascends to $500 an ounce, silver
goes to $8.00. More institutions adopt precious metals as an
asset class to hedge against currency depreciation.

9. Japanese economic momentum gains steam. An emboldened
Koizumi becomes more aggressive on banking
reform and easing cross-border merger and acquisition restrictions.
Deflationary forces diminish and capital spending
and profits improve. The Nikkei 225 rises to 13,000.

10.The Republicans provide some of their own fireworks
just before the Fourth of July. Dick Cheney announces he
will not join President George W. Bush in running for reelection
in November. Senate majority leader Bill Frist
replaces him. In reaction to Bush’s decision to reduce troops
in Iraq during the summer, Defense Secretary Donald
Rumsfeld and his deputy Paul Wolfowitz resign, saying their
work is essentially done.”

[dw]

1. "Bearish Alternate for Information Only"

This guy's too smart to be that blatantly optimistic. He added this to the article to cover his tail (bold is mine to emphasize significant differences)...

1. The prolonged covert effort to find Osama bin Laden finally pays off. He is captured while changing caves along the Pakistan-Afghanistan border in a complex ambush involving mountain-climbing ground troops and helicopters. Intelligence following the capture shows Al Qaeda in a state of financial stress and disorganization, but there is another casualty-producing terrorist attack in the U.S. in 2004, temporarily increasing the risk premium for equities and slowing the Bush reelection campaign steamroller.

2. The economy keeps barreling along after developing its own post-stimulus momentum. Real growth exceeds 5% and productivity consistently registers above 4%. Standard & Poor’s 500 earnings rise to $64 even though more companies recognize stock options as a compensation expense and take charges to fund pension liabilities.

3. As a result of the combination of the strong economy, the continuously rising trade deficit, and the increasing Federal debt, the 10-year U.S. Treasury yield rises to 6%.

4. China’s extraordinary growth and stronger economies elsewhere continue to push up commodity prices. Concern about rising inflation causes the Federal Reserve to raise short-term interest rates 300 basis points to 4%. Inco and Phelps Dodge, already big 2003 stocks, prove to be winners again in 2004. Dow Chemical and Alcoa also perform well. Capital goods stocks like Honeywell and General Dynamics continue to rise.

5. Higher short and long-term interest rates are too much for the equity market. After a rally early in the year, the S&P 500 runs out of fuel and closes at 1000 in December in spite of higher earnings, proving again it’s best to buy when the outlook is bleak.

6. Political conditions in Saudi Arabia deteriorate, endangering the monarchy there. Radical Islamists increase their popular support, and crude production is reduced. The price of oil moves above $40, adding to inflation concerns. ConocoPhilips and BP are big-cap outperformers.

7. Japanese economic momentum falters. Deflationary forces take over once again, earnings prove disappointing, and the Nikkei 225 drops below 9,000.

8. The world increasingly loses confidence in the dollar. China and Japan, which have been buying U.S. bonds to bolster trade and ward off protectionist legislation, finally give up. The euro rises to 1.50 and the dollar/yen drops to 90. Inflationary pressures increase.

9. Silver becomes the precious metal of choice. While gold ascends to $500 an ounce, silver goes to $8.00. More institutions adopt precious metals as an asset class to hedge against currency depreciation.

10. The Republicans provide some of their own fireworks just before the Fourth of July. Dick Cheney announces he will not join President George W. Bush in running for reelection in November. Senate majority leader Bill Frist replaces him. In reaction to Bush’s decision to reduce troops in Iraq during the summer, Defense Secretary Donald Rumsfeld and his deputy Paul Wolfowitz resign, saying their work is essentially done.