|
PureBytes Links
Trading Reference Links
|
An Analysis of an Analyst's Predictions
By Dave Kansas, http://www.thestreet.com
Editor-in-Chief
1/4/01 4:09 PM ET
Every year, Byron Wien, the U.S. strategist at Morgan Stanley Dean
Witter, comes out with a list of surprises. He sets a tough standard,
saying that the surprises should be genuine. His criterion: They
should be viewed, generally, as a one-in-three possibility, though he
believes there's a 50% chance or better that each surprise will come
true. This list has become popular primarily because Wien has a
tendency to be right when it comes to surprises.
Last year, for instance, he correctly anticipated aggressive Fed rate
hikes and a falling stock market. He also correctly predicted the
decline of Internet stocks, the jump of oil prices above $30 and the
outperformance of the Russell 2000 small-cap index. Some misses:
Treasury yields rising to 7.5%, McCain vs. Bradley in the
presidential election and the successful restructuring of Europe.
This year's surprises anticipate recession, aggressive Fed moves and
more struggles in the stock market. The list was written before the
Fed moved this week, so some of the surprise sheen has already worn
away. Moreover, unlike past lists, I think this one is less
surprising all around. But maybe I'm just overly confident in Wien's
soothsaying abilities.
So, here's a breakdown of this year's surprises:
1. Fears of legislative gridlock notwithstanding, President Bush
forges a surprisingly constructive working relationship with the new
Congress. Important legislation on health care, education and income
tax reduction passes. A bipartisan bill to reduce estate taxes to the
equivalent of the capital gains rate passes easily. Bush proves to be
a "unifier" after all.
You know what, I don't think this is such a daring opening salvo from
Wien. Sure, the newspapers are filled with the hue and cry of how
narrowly divided the government is, but I think we underestimate how
much a president can drive the agenda. Recall that Bill Clinton
polled in the low 40s first time around but still managed to get his
massive health care initiative pretty far down the track before it
imploded. I think Bush, with more modest aims (save for the massive
tax cut), will prove effective at driving piecemeal change.
2. The dollar remains surprisingly strong against the yen and the
euro as the economies of other major industrialized countries sag
unexpectedly in response to the weak U.S. economy. The yen-dollar
exchange ratio reaches 130 and the euro sinks to 75 cents. Germans
take to the streets in protest over the unworthy successor of the
once-proud deutsche mark. Wim Duisenberg resigns as president of the
European Central Bank and Hans Tietmeyer is called out of retirement
to take the helm of the beleaguered institution.
Now this would be a surprise, especially because the Fed has started
slicing rates. The euro is long overdue for a rebound, and the Fed,
by cutting rates, is undermining the dollar's strength. Tietmeyer? No
way, Jose. The French are aching to get the top seat at the ECB, and
they're not going to let the Germans beat 'em to the punch.
3. Despite the surprising weakness in the global economy, the price
of crude oil soars to $40 as the winter proves colder than expected
and fuel-source inventories remain thin. OPEC increases production
modestly, but strained refining and marketing capacity keeps the
price of gasoline and heating oil high, leading to an outcry by
consumers and regulatory authorities. Legislators are outraged but
confused about what action they should take. There is a Vietnam war-
type demonstration at the Strategic Petroleum Reserve.
Whoa! Byron loves his public anger. But this is folly. If you believe
No. 1 surprise (Bush effective), as I do, then this administration
will have a very effective energy policy out of the gate. I think the
focus on energy, as well as a renewed drive for more exploration and
development of oil fields puts a cap on oil prices, even if the
winter is a bit more brisk this year.
4. The Japanese economy slips back into recession, even though
aggressive fiscal and monetary stimulus tries to head it off. The
Nikkei 225 declines and threatens to fall below the level of the Dow
Jones Industrial Average.
Sometimes he cheats. The first half of this prediction can't really
be termed a surprise. It'd be a surprise if Japan suddenly started
shaking its booty and began growing again. But Byron saves himself
with the radical Nikkei-Dow forecast. Unless the Dow puts in a
monster year, this is very unlikely.
5. The U.S. economy dips into outright recession in the first half of
2001. As the unemployment rate moves up toward 5%, the Federal
Reserve eases aggressively, taking the federal funds rate down by 150
basis points by midyear. Yields on the 10-year Treasury note threaten
to pierce 4%. Recovery is muted in the second half of 2001 and profit
surprises remain skewed toward the downside.
Again, Wien wrote this before the Fed started moving. And I think
that makes this a less surprising possibility. The Fed is already
headed in that direction. Recession call? A mug's game. Maybe, maybe
not, though I'd wager that we don't get the two consecutive quarters
of declining growth that would define a recession.
6. Instead of rising 10% as the consensus expects, Standard & Poor's
500 earnings decline because of the cost of amortizing capital
equipment and servicing debt on modest growth in revenues. The
indexes do not have a major rebound, but rather continue to
consolidate and digest the gains of the late 1990s. The S&P 500 is up
less than 10% after making a new two-year low in the spring.
The earnings piece of this is a bold statement. And if it comes true,
I think the S&P 500 would be up less than 10% -- in fact, it'd
probably be down for the year again.
7. Value outperforms growth in the U.S. and small- and medium-
capitalization issues beat large-caps. Old Economy stocks do better
than New, but at least two household names in American industry agree
to mergers to avoid Chapter 11 filings.
This is an allusion to Xerox (XRX:NYSE - news - boards), probably.
That company is having a very tough time, and it would certainly
qualify as a household name. One wonders, however, what the other
household name might be. Would Amazon (AMZN:Nasdaq - news - boards)
rise to such a qualification?
8. Consumer electronics and home improvement retailers become hot
stocks in the second half of the year, led by Best Buy (BBY:NYSE -
news - boards), Circuit City (CC:NYSE - news - boards), Home Depot
(HD:NYSE - news - boards) and Lowe's (LOW:NYSE - news - boards).
Now, I wonder why this is. Some deep, gut feeling? Is Byron on a
personal do-it-yourself binge? In love with the PlayStation 2? Hard
to say. But if the Fed moves aggressively, as we're seeing, then the
Home Depots and Lowe's of the world ought to put in a decent year.
9. The semiconductor inventory cycle turns up as the Fed's easing
finally starts to work. New products associated with wireless data
and optics begin an important new growth trend. Broadcom
(BRCM:Nasdaq - news - boards), National Semiconductor (NSM:NYSE -
news - boards), Applied Materials (AMAT:Nasdaq - news - boards) and
Teradyne (TER:NYSE - news - boards) have major moves.
Now wouldn't this be a sight for sore eyes! A return to form for the
chip stocks. Notable in its absence: Intel (INTC:Nasdaq - news -
boards). That tells you something about the way Wien sees the tech
world unfolding. Also interesting: This list completely ignores two
of the titans of yesteryear: Microsoft (MSFT:Nasdaq - news - boards)
and Cisco (CSCO:Nasdaq - news - boards). One wonders if this is an
omission of importance.
10. Causing some hostile comments from his brother Jeb, George W.
Bush lifts the embargo on Cuba and allows unlimited travel and
investment there. This unexpectedly spurs the South Florida economy,
and the Bush brothers reconcile at an emotional Thanksgiving
celebration. To finance infrastructure projects, Cuba issues bonds
that can be redeemed in local currency or dollars. They become known
as Castro convertibles.
Now this would be some surprise. After kind of edging toward
surprises throughout the list, Wien lets go with a wild one. Perhaps
we will see some kind of emotional Turkey Day festivities in the Bush
household, but the idea of a complete lifting of the embargo? Not
likely. If Wien gets this one right, I'll gladly fly to Havana and
lift a glass in his honor. In fact, I'd lift several glasses and fly
a gang of friends down with me. But I don't think I'll have to hustle
to get those reservations anytime soon.
Another list, but always a good one. Amazing how the Fed move has
changed the tenor of this list already, making much of it less
surprising in nature.
To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxx
|