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Surpassing the Seven Second-Half Surprises

Readers fire back.

Monday I ran down a list of seven surprises for the second half of 1999. As many of you may recall, I have done something similar at the start of the last two years. And before I get to your excellent suggestions, let me do a quick rundown on how the 10 surprises for 1999 are doing.

    The stock market rallies early, but the gains peter out by midyear. Have to say this one looks like it is doing pretty well at this point. Japan recovers. Early hints look good here, too. The upcoming tankan report on business confidence will have a big bearing on expectations for the rest of the year. Clinton is impeached and removed. Whoops. Even when I wrote this Clinton had already been formally impeached. So I don't even get half credit. Included in this item: A prediction that George W. Bush wouldn't run and that Bob Kerrey would. Double oops. Independent candidate emerges for president. Still feel good about this one. Don't know if it'll be Jesse Ventura, but in these fat times I have to believe somebody will emerge. Internet stocks will continue to roar. Depends on your perspective. Since the beginning of the year, this is true. More recently it is less true. Still, I'm giving myself partial credit. Super Bowl indicator debunked. This was predicated on a Minnesota Vikings win. Now that Denver has won and the market is up, I could still be right for the wrong reasons. Emerging markets revive. Have to say this one is looking good. Even noted that Eastern Europe would continue to struggle. Military confrontation creeps closer to the heart of Europe. Nailed this one. Second best call of the year. So far. Oil prices jump. Best call. Oil prices have surprised folks by heading higher. The Artist Formerly Known as Prince returns to the mainstream a hero. Too soon to tell. But hopes are fading.

Now, these replies range from the intriguing to the bizarre. Have a look and feel free to

fire back others. I will get as many as I can in front of you all.

Presidential Synergies

Can't imagine anything worse than a confrontation over Taiwan for the markets.

On a less scary note, G.W. Bush will skid in the polls as he is forced to reveal specific positions, but the charming Texas patrician will merge forces with the civil servant's son,

John Kasich

, and the synergies will prove too formidable for

Al Gore

or

Bill Bradley

.

--

Daniel Calarco

Hard Feelings in Kashmir

I think your seven surprises are pretty close to right. However, I'd like to add my assessment to your fifth surprise (Korea or Taiwan as the next hot spot). I think that the next hot spot is much more likely to be the Indian subcontinent (India vs. Pakistan over Kashmir). Given the high tensions in the area already, I estimate the probability of a full shooting war in the next six months at 70%. Furthermore (and all the more scary), I figure the chances of this conflict going nuclear are as high as 25%. Given China's claims in the area and its ties to Pakistan, and the Clinton administration's desire to appear the peacemaker, this too has the potential for the interesting China-U.S. tango you referred to.

-- Jason Dilks

Defecting to Bradley

You are on target with Bush. One thought to consider.

Watch the Republicans who are concerned with the economic health of our country and our continuing ability to compete in the world markets, you may see a number of defections to Bill Bradley yet this year.

If some popular and well-known Republicans make this switch (i.e.,

Colin Powell

, possibly others), the Democratic primary and convention will become a surrogate for the November elections.

-- Harry Deitzer

Grade Inflation

Quite creative, Davey. Now your teacher will assign marks:

    7/10. But the Fed only bails out the Long Term Capital Managements of this world when they are financed by American banks. 7/10. Good. Shows you're reading extends outside the business and sports pages. But ... the market will trundle "behind" on this uncertainty. 2/10. Producers have learned that it's better to sell 90 barrels at $18 than 100 barrels at $12. 8/10. Part of the "bubble bursting" now in progress. 1/10. Like most Americans, you need a good survey course on Chinese history. Be prepared: It covers 7,000 plus years, not the 500 you are used to in studying you own country's. 8/10. But "banking cleaning" is the key. Ever try to decipher a Japanese Web site? 2.5/10. Nice guy and all that (PM and I share the same birth day and month) but the Europeans understand match play. Even Tiger Woods, who does understand it, has problems at the Ryder Cup. Please gird your psyche for another humiliation.

So you averaged just over 5/10. Not bad, actually, since it emanates from the world of sizzle and not steak.

-- Peter B. Irvine

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Deep in the Heart

Your seven surprises all seem very possible and, in my humble opinion, probable. Just had to write a short thank you for the shrub (George W.) comment. Way to go! It seems that no one (especially here in Tex-A**) thinks the dip**** can fail! Thanks for bringing that up as at least a possibility. Would love to know what kind of comments that note garners -- it might have gotten you shot here!

-- Marysol McGee

Play Ball

A subway series.

-- Adam Tracy

Another Three

    The Fed, focusing in on the most obvious defect in our economy that can be controlled by its actions, raises margin requirements on stocks. This will take place this week. The economy will be marginally affected, as most stocks are not margined (deferred compensation and mutual funds own most stocks), but the Japanese-style asset bubble that has caused conspicuous consumption and a negative savings rate will be broken; thousands will lose their daytrading shirts, and the Net sector will collapse to realistic prices, e.g., their original IPO levels, or thereabouts. Commodity prices (which are again declining) and the inability of manufacturers to pass on higher costs to end-users have kept inflation dampened, and the Fed doesn't want employment, the key element to prosperity, to suffer as a result of higher interest rates; it does not raise rates this week, using the surgical strike of margin requirements. The economies of Asia and Europe are profoundly disrupted by the Y2K problem, causing a reduction in U.S. exports and slowing the domestic economy. The long bond yield declines by a full point to 5.25% by March 31, 2000. Oil prices will decline for reasons you mentioned, but also because the demand for oil is highly inelastic and because technology has been reducing the per-capita consumption for some time. The proliferation of hybrid auto engine technology will further reduce demand for hydrocarbons. The SUV fad will come to an end, with annual unit sales down by as much as 40% in 2000.

-- Stanley Nugit

Everything Must Go

I'm not sure whether you thought of this one yet, but I'll fire away: The Y2K situation will scare quite a few investors into liquidating holdings before the end of the year. Then, after they feel secure that things are safe again, they will repurchase what they sold earlier. I have a feeling that more than one money manager will play this angle.

-- Kirn Dhaliwal

The Glass Slipper

Good list,but two things missing:

    Is one Fed hike enough? (That is implied by the oil prediction but could be offset by prediction on Japanese economic strength.) What about a Cinderella team (more likely from the National League than the American) getting to the World Series?

-- Richard Davies

Long Shots

Here are two quickies:

    With the Net keeping prices down, the Fed will lower rates before the year is out. The Red Sox will take the World Series, erasing the Curse of the Bambino.

-- Barry Callahan

I'll Tumble for Ya

My prediction for the second half of the year is that investors will fret and worry about having their money in the market during such an unsure time such as Y2K. Due to the unknown, which always kills the market, fund managers will start selling stocks to meet redemptions. Selling will feed upon itself and cause more selling. Soon, the markets will tumble, giving many of us the best buying opportunity on Wall Street in a long time.

Now, I'm not predicting a 1929-style crash necessarily, but after watching and understanding how Wall Street hates the unknown, i.e., Clinton/impeachment, Long Term Capital, Asia, Interest rates/inflation, etc., I've come to the conclusion that Y2K is too big of an issue on people's minds to ignore. It will not matter whether the Y2K bug is real or not.

-- David Allen

Accidents Do Happen

I like your surprises -- and I agree about George W. Bush's upcoming bumbles. He is an accident waiting to happen, and I am glad I'm not a Republican putting stock in this guy.

-- Chris Schreur

Seven More

    Corporate profits will plunge in 2000. Permabulls will find that value cannot be found even in the bluest of the blues. Analysts' earnings expectations for the fourth quarter forward are so far off base that Advanced Micro (AMD) - Get Advanced Micro Devices, Inc. Report and Compaq (CPQ) results will begin to look like the norm. After a Fed-induced plunge in bond prices in response to Alan Greenspan retaking control in '99, interest rates on the long end will drop like a stone in 2000. Rates for 30-year Treasuries will drop toward 4% (if not lower) by year-end 2000. Flight-to-quality issues and Y2K realities will make current inflation threat a bogeyman. International fallout from Y2K will stagger the current complacent mindset. Deflation will rule! Biggest surprise to equity investors next year? Causal drop in rates will not be a positive for the market as the New Paradigm psychology implodes. Larry Kudlow will seek economic asylum and career counseling as sell-side research analysts who fell for his America the Great rants want a piece of his hide (gotta blame someone, ya know). Michael Eisner will resign under pressure. The only good division left at Disney (DIS) - Get Walt Disney Company Report is Miramax, ironically the only area left untouched by the Eisner genius. Despite the timely arrival of its apparent archangel George W., the GOP will lose control of the House and most likely the Senate to the Dems. Voters may be tired of the Clinton finger wag, but they just don't trust those in control of the "real" Republican agenda. Trent Lott, Dick Armey and Mr. Creation himself, Tom Delay, will be driven (ridden) off into the sunset by an emerging pragmatic leadership. In: Ron Insana. Out: Joe Kernan. Staid business news and commentary make a comeback at the expense of the increasingly silly entertainment from the Lava Lamp genies. Out with the Hair, and in with the Bald. Last, but not least. The Lakers will be better, but again not good enough even with the addition of a real Chicago Bull psychologist at the helm (too bad boys, and I do mean boys). Kobe Bryant will flourish under Phil Jackson. Shaq will sulk, won't dig Phil's popularity, and will post an even worse free-throw percentage in 2000 (and they said it couldn't be done). Upon reflection, this should not really be a surprise, so I won't count it. What would be a surprise is if the Laker team quit whining and blaming each other for the team woes, and that is something I will not forecast.

Go

Portland

(real men). Now there's an emerging bull market if I ever saw one.

-- Larry Boyd

More Long Shots

    Fed Chairman Alan Greenspan will hire a boy scout, girl scout or professional crossing guard to help him avoid getting hit by a bus as he sprints to the Hill or to FOMC meeting. Maria Bartiromo, giving her breathless preopening report from the floor, will be blindsided by a 220-pound broker eager to get to the phone bank behind her. Maria will go down hard; the broker, not breaking stride, will go for the phone and get his orders in. Maria will suffer lacerations, bruises and five stiches ... but trooper she is, will return two hours later in the same spot, continuing as if nothing happened. Cramer will get better and better. This can be ascertained by the number of emails he gets blasting him. Keep a close watch on the Stupidity Quotient index. This is an index I've devised that records how many times Joe (the perpetual bull) Battipaglia and Larry (I love this country and everything's always comin' up roses) Kudlow scream BUY! It just flashed again.

-- Alan Grenblatt