Crystal balls at year’s end are a dime a dozen on Wall Street. The theoreticians at the investment houses like to put out their lists of stocks to own for the coming year, backed up by seemingly convincing metrics that prove only that someone knows how to extrapolate revenues given a top-down forecast that never gets met. That’s not how I play it. I see my job as being more of a horse whisperer than a fortune-teller, with the apparently random moves of stocks telling me what’s going to happen. I know—for you, the stock quotes may just be lines of agate type, skipped over like early-season NBA box scores. Not for me. Stocks are noisy, cacophonous beasts, signaling their intentions well before they get to their destinations. You just need to know how to listen.
Let me give you the gist of what I’m hearing as we head into 2005. Overall, we’re in for another good year, with 3 percent to 4 percent GDP growth and little inflation. That will translate into higher stock prices, with the S&P gaining 8 percent to 10 percent, a pattern not dissimilar to 2004. The positive action will no doubt be force-fed by takeovers, particularly by foreign acquirers, and the pending “reform” of Social Security. Also, the new year will reinforce a lot of the trends that this year is ending with: strong Internet, a buoyant housing market, and, unfortunately, still higher energy prices. And 2005 might be the year we get the give-ups, the recognition that some industries have too high a cost to survive in this era of unfettered, cutthroat, McKinley-esque capitalism. As we turn the page on 2004, ten trends are speaking to me.
1. The colossus of Wal-Mart, the greatest retailer known to man, will stumble badly.
A host of other, better retailers, with stores that don’t resemble the Soviet-style racks and aisles that Wal-Mart stores have come to resemble, will take share: Target on the fashion side (if you even believe that Wal-Mart offers anything like “fashion”), Best Buy on the hard-goods side (wow, what a great quarter it just announced), Whole Foods on the food-retailing side, Lowe’s and Home Depot on do-it-yourself lines, Costco on the large-size wholesale-like goods, and a resurgent Sears, aided by ABC’s Extreme Makeover: Home Edition and the retailing touch of Eddie Lampert, courtesy of the Kmart merger. There’s still time to sell Wal-Mart’s stock: Wall Street won’t stop loving this behemoth until long after it has lost whatever charm it once had.
2. North America will experience a new oil rush.
Courtesy of heavy Chinese buying and a virtual shutdown of Russian oil fields (no Western company’s willing to invest in a regime in which the government expropriates at will), the price of crude will continue to stay in the $40 range. Old fields, long since considered uneconomical, will get exploited; the oil drillers will soar in value, as will those oil companies with the largest domestic holdings. The oil complex will go from being 7 percent of the S&P 500 to 10 percent, with the major oil companies once again becoming among the largest corporations in value on the New York Stock Exchange. Halliburton, Noble Corp., Tidewater, Nabors, Baker Hughes, and Schlumberger will all become household fixtures in American portfolios. ChevronTexaco, Kerr-McGee, and ConocoPhillips will be revered as the new blue chips for their consistent dividends and drilling prowess.
3. Fresh water will become, after oil, the next great growth commodity.
Don’t take my word for it; listen to Nick DeBenedictis, who runs Aqua America, the nation’s largest publicly traded water utility. Tighter regulatory standards, continued population growth, and the need for mom-and-pop water companies to upgrade equipment are causing a wave of mergers among the hundreds of water producers in America. DeBenedictis is rolling up all the little water companies, buying the new equipment needed, and producing safe, clean water for the masses. DeBenedictis recently told me that he expects Aqua America to become a virtual national water utility. Given its bountiful dividend (increased regularly) and great balance sheet, widows and orphans will begin to replace the old-fashioned power-generation offerings in their portfolios with Aqua America. Pentair, a huge supplier to Aqua America that makes water-filtration equipment, will emerge as a premier choice among growth-portfolio managers to play the water shortage. Tyco Water and ITT Industries could also benefit, although they have a lot more to them than just filtration equipment.
4. Despite Fed hikes that will bring the return on cash up to 4 percent, housing will stay hot.
Bubble? What bubble? Toll Brothers, the largest high-end land bank in the country, will double in value, again, as it has one of the largest supplies of undeveloped land, the development of which can’t be stopped by the myriad environmental groups out there that don’t have the wherewithal to take on Toll. Lennar, which just reported a brilliant quarter, and Centex, another well-run outfit, will also benefit.
Every airline will be forced out of business save JetBlue and Southwest. The others can’t handle a big uptick in oil with their crummy balance sheets.
5. Merck will be transformed into a victims’ trust.
Tort lawyers will find a federal judge willing to carve up Merck into a trust that will forever pay the families of those loved ones who took Vioxx for shoulder pain and ended up dying of a heart attack. A backlash against the destruction of Merck will lead to genuine tort reform, but it won’t come fast enough to save the once-sainted pharmaceutical giant. The only really protected area here is biotech. A basket of biotech, the Biotech HOLDRS Trust—an exchange-traded fund—may be the best way for the individual to play the fall of Big Pharma and the rise of biotech. Traditionalists can bank with Johnson & Johnson, which has enough non-pharma, including medical devices, to make it attractive.
6. After a series of suicide car bombings in this country, the attorney general will authorize a national I.D. card.
California-based LaserCard will get the contract, since it already has the contract for green cards, and the stock will soar back to levels not seen since right after 9/11. General Electric, which recently purchased InVision, the biggest maker of security X-ray equipment, will offer to insure all ports and airports with its security technology, and Homeland Security will give the conglomerate the contract. L-3 Communications, another big maker of airport screeners, will fight for a piece of the contract and get it.
7. Oil will stay high, forcing every airline company out of business save JetBlue and Southwest.
Sound far-fetched? United, Delta, AMR Corp., US Airways, and even Continental can’t handle a big uptick in oil with their crummy balance sheets. If oil stays high, they could—and should—all fold. JetBlue and Southwest will then divide the gates and become extremely profitable ventures. The employees at the failed airlines will get bupkes from the government and sue, but they’ll draw a newly appointed conservative judge who will rule that it’s time for capitalism to show its ugly face and let losers lose. President Bush, while “unhappy” with the decision, will applaud its decisiveness, and the message will be clear: This is the Bush version of Reagan’s smashing the air-traffic controllers union.
8. The president will ram Social Security “reform” through Congress by getting brokerage houses to lobby for the change.
George Bush will promise Goldman Sachs, Morgan Stanley, Schwab, Lehman Brothers, and Bear Stearns the contract to privatize Social Security and let them be the administrators of the project. These firms will then get their employees to give millions to politicians who are on the fence. Their stocks will triple in value from the prospect of the new business, they’ll pressure the Republican-led Congress for swift passage in the fall of 2005, and the deal will get done.
9. The market’s love affair with the Internet and profitable growth will take a new form.
Portfolios once filled with Cisco and Dell and Microsoft and Intel and EMC will abound with Google, eBay, Research in Motion (BlackBerry), Qualcomm, and Yahoo, all hugely successful companies with fat bottom lines. The acronym GERQY, for the above-named companies, will become common parlance as investors brag to each other at parties how early they got into the phenomenon. Google will get added to the S&P 500 and go to $250, where it will turn out to be “cheap” on 2005 earnings of $5 a share.
10. The Chicago Merc will buy the New York Stock Exchange and merge it with the NASDAQ to create one giant seamless market based in Chicago.
The Merc, which is a publicly traded stock that has vaulted 210 percent this year, needs to put that market cap to work by making acquisitions. Our markets are hopelessly unrationalized now. The Merc can fix that and take 100 percent of all stock, derivatives, and futures trading—a move that will eliminate the cumbersome specialist system, create a profitable behemoth, and give our markets the worldwide technological edge they need—and lack right now—to dominate. The New York Stock Exchange will become part museum, part financial-district Bowlmor Lanes.
Special bonus takeover plays for 2005: Sony will buy Apple, Time Warner will re-buy Martha Stewart Living Omnimedia, and Viacom will dump Infinity Broadcasting on the public and snare Electronic Arts for $70 a share. Oh, and a wild one: As a last Eisner act, Disney will bid for Comcast, as payback for Comcast’s hostile tender offer that rocked Eisner’s world last February. Revenge remains a dish best served cold.