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"Surprises in Store for 2004"


By Doug Kass
Special to Street Insight
11/26/2003 12:14 PM EST


"A year ago, I prepared a list of 25 possible surprises for 2003. These were not intended to be forecasts or predictions, but rather were intended to represent "overlays," meaning events that might have a reasonable chance of occurring despite very long odds. Let's call these 25 "possible improbable" events!

I have long felt that developing a variant view (read: surprise) remains an integral part of differentiating one's investment returns. Mainstream expectations are just that, and in most cases are deeply imbedded in today's prices.

The purpose of this endeavor is to consider positioning a portion of my portfolio in some part based on outlier events. After all, Wall Street research is still very much convention and groupthink, despite the reforms over the past several years. If I succeed in making you think about outlier events, the exercise has been successful.

Some of my surprises were on target last year; to be precise, about one-third of the "possible improbables" came true. In particular, the following events had a familiar ring for readers of my "2003 surprises":


We saw a 3.25% yield on the 10-year Treasury note.


There was further deterioration in AOL's (TWX:NYSE - commentary - research) subscriber base, and Steve Case was ousted.


The European economy was moribund during 2003's first half.


The New Jersey Nets basketball team enjoyed surprising success.


General Electric (GE:NYSE - commentary - research) had lower earnings guidance.


Democratic aspirant Al Gore bowed out of the presidential race.


There were no major terrorist acts in the U.S.


U.N. inspectors found no evidence of a weapon buildup in Iraq.

Here is my list of possible surprises for 2004:

1. A revolution in Venezuela overcomes the existing regime in early 2004 (four South American presidents have been toppled over the past four years!), cutting off oil production in that region and forcing crude oil to trade over $50 a barrel. The consumer is paralyzed, and retail sales nosedive. Rising energy prices and other cost push pressures (like health care and insurance) cause a mini-panic in the world equities markets, and share prices plummet by more than 15% in a brief three-week period. At the same time, the U.S./China rift widens, and all-out trade war ensues (albeit briefly), crippling the U.S. apparel business.

2. Interest rates plummet and the yield on the 10-year Treasury note makes a new low, briefly breaking below the 3.00% mark by midyear. We end 2004 at about the same levels that exist today.

3. Facing rising energy prices, the automobile industry's fortunes erode dramatically as the consumer is non-responsive to further incentives. Ford (F:NYSE - commentary - research) loses more than $1 billion in the second quarter of the year. William Ford Jr. steps down.

4. With the cost of capital declining to unprecedented low levels, a relatively quick restoration of order in South America and the emergence of an overall calm in Iraq (as President Bush orders more troops in to stabilize that country), merger activity explodes and stock prices follow suit. The world equities markets end the year nearly 30% higher than the May lows and close at about 15% higher than year-end 2003 levels. Financial stocks and, briefly, oil stocks are the principal market leaders, but technology stocks languish throughout the entire year (portability proves to be a non-event) and end the year slightly lower than at 2003's year-end.

Internet stocks prove to be one of the worst performing sectors of the market, after New York Attorney General Spitzer sues eBay (EBAY:Nasdaq - commentary - research) and Amazon (AMZN:Nasdaq - commentary - research) for non-payment of state sales taxes.

Despite a widespread belief that housing activity will fall off the cliff, the rise in home prices (fueled by ever-lower mortgage rates) continues apace and begins to resemble the bubble in the Nasdaq of the late 1990s.

5. Beginning at mid-year, Genworth Financial, the General Electric spinoff, embarks on a series of high-profile acquisitions (which include CNA Financial (CNA:NYSE - commentary - research), Fidelity Financial and H&R Block (HRB:NYSE - commentary - research)), spurring an unprecedented round of industry consolidation in the financial sector.

6. After the mini-panic in the markets in the first half, and in response to Genworth Financial's takeover announcements, the following acquisitions are announced and consummated:


Merck (MRK:NYSE - commentary - research) acquires Schering-Plough (SGP:NYSE - commentary - research).


Fidelity acquires Janus (JNS:NYSE - commentary - research).


News Corp. (NWS:NYSE - commentary - research) and MGM Mirage (MGG:NYSE - commentary - research) acquire a loss-ridden DreamWorks.


J.P. Morgan (JPM:NYSE - commentary - research) acquires Countrywide Credit.


Fifth Third Banks (FITB:Nasdaq - commentary - research) acquires National Commerce Financial (NCF:NYSE - commentary - research).


Wachovia (WB:NYSE - commentary - research) acquires First Tennessee (FTN:NYSE - commentary - research).


GrupoTelevisa (TV:NYSE - commentary - research) acquires Univision (UVN:NYSE - commentary - research).


Wells Fargo (WFC:NYSE - commentary - research) acquires Capital One (COF:NYSE - commentary - research).


Tyco (TYC:NYSE - commentary - research) acquires Toll Brothers (TOL:NYSE - commentary - research).


Citigroup (C:NYSE - commentary - research) acquires Alliance Capital (AC:NYSE - commentary - research).


Polo Ralph Lauren (RL:NYSE - commentary - research) is acquired in a leveraged buyout.


Nike (NKE:NYSE - commentary - research) acquires Gap Stores (GPS:NYSE - commentary - research).

7. The IPO and secondary markets launch a meaningful comeback during the second half of the year. Indeed, the IPO market heats up and, like rising home prices, begins to resemble the bubble of 1999-early 2000 (something no one presumed likely!).

8. Fidelity goes public in an IPO that doubles in the first day of trading.

9. A well-known and large hedge fund fraudulently misprices its portfolio of private investments and has a run on its assets. Calls for stricter regulation of hedge funds gains momentum as the Senate conducts public hearings.

10. Time Warner sells its AOL division to Kohlberg Kravis Roberts in a leveraged buyout during the third quarter after settling SEC charges in early January 2004 and as subscriber losses moderate.

11. Marsh & McLennan (MMC:NYSE - commentary - research) sells its Putnam subisidiary to Warren Buffett's Berkshire Hathaway (BRKa:NYSE - commentary - research). Marsh shares rise by more than 50% in the aftermath of the sale.

12. A low-cost airline carrier, which turned out to scrimp on maintenance and pilot training, crashes.

13. Tiger Management's Julian Robertson re-emerges as a major force in the hedge fund community -- after raising more than $5 billion for a new partnership.

14. Eliot Spitzer announces that he has no intention to run for public office and enters the private sector.

15. Robert Rubin leaves Citigroup (C:NYSE - commentary - research) and replaces an aging Hank Greenberg as AIG's (AIG:NYSE - commentary - research) chairman.

16. A unified Democratic party rallies behind Mass. Sen. John Kerry after three state primaries. However, President George Bush wins the presidential election in one of the largest pluralities in history as Sen. Kerry wins only two states in the general election.

17. SunTrust (STI:NYSE - commentary - research) distributes its 122 million shares of Coca-Cola (KO:NYSE - commentary - research) in a secondary offering."

(in www.realmoney.com)