Five Under-the-Radar Trends for 2005

'Tis the season for lists of predictions, trends and "best of" picks. Investors get deluged with articles offering advice on where to invest and suggestions for must-own stocks. This isn't that kind of column.

RealMoney readers already know the impact oil has had on the economy, that deflation (and inflation) were issues, that the dollar has been weak, that Iraq is problematic, that the Federal Reserve raised short-term interest rates and that dividends were important in 2004, and will be even more so next year.

Let's avoid the obvious. Instead, think about issues that have received less coverage but are of no less importance. Because these issues have been under the radar, the markets may not yet have fully discounted their potential impact. As such, these issues still have the ability to surprise, and therefore, significantly impact prices.

Here's what may startle the markets in 2005:

1. FASB Option Expensing Begins June '05

When should the captain of the Titanic have started worrying about icebergs, in the safety of port, halfway across the Atlantic or near the coast of Greenland, where the killer berg is thought to have originated? Investors may wish to consider the proposed Financial Accounting Standards Board rule changes that would require companies to expense employee stock options, called "Accounting for Share-Based Payment," as a similar hazard.

So far, about one-quarter of S&P 500 companies have begun expensing options. A lot depends on what companies, tech firms in particular, actually do when the rules are put into effect. Right now, all that is required is a "footnote disclosure of employee option cost." Typically, the true costs of options programs do not come off the bottom line. The expenses, while real, do not impact reported earnings or the price-to-earnings ratio. While they are footnoted, the actual costs essentially are off the balance sheet.

I am the lone RealMoney bear on this issue. I suspect that will change as we approach June 2005. Either tech firms will have to cut back drastically on their generous option packages, something they long have claimed will negatively impact their recruiting and retention policies, or they will see their P/Es shoot up dramatically.

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At the time of publication, Ritholtz was long Ampex, although holdings can change at any time.

Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].