TCS Daily

A Shocking Prediction for 2004

By James K. Glassman - January 5, 2004 12:00 AM

Byron Wien, the veteran Morgan Stanley strategist, is one of my favorite market seers. Annually since 1986 he has sent clients a list of "ten surprises" he expects for the year ahead. The list for 2004, released this morning, is wonderfully optimistic, and it includes a true shocker on the subject of pharmaceutical policy.

The ground rules for surprises, he writes, is that while the consensus places only about a one in three chance of their happening, Wien thinks the odds are better than even. "Usually," he writes, "more than half the component elements take place during the year."

His 2003 surprises were particularly prescient -- especially if you can project yourself back to those gloomy times, when the economy was sputtering (growth in the fourth quarter of 2002 was a measly 1.3 percent), the stock market was crumbling, and we were on the brink of war with a country that, we thought, might fight back with chemical and biological weapons.

Wien's number-one prediction for 2003 was that stocks would surge more than 25 percent during the first half of the year. Actually, the benchmark Standard & Poor's 500-Stock Index dipped through early March, then performed the 25 percent surge in a little over three months and kept moving up. It finished with a return of 28 percent, including dividends.

Wien's second big prediction was that the U.S. economy would confound "doubledip worry-warts and [show] 4 percent real growth in 2003." That, too, was a far-out forecast, and he was right on the nose. The fourth-quarter numbers aren't in yet, but between Oct. 1, 2002, and Sept. 30, 2003, GDP rose 3.6 percent. Almost certainly, growth will exceed 4 percent for the full year.

He also predicted correctly that tech companies like Microsoft would start paying dividends, that the "housing bubble" would not burst but grow larger and that Japan's Nikkei index would "climb to 11,000." He missed a few: that Saddam Hussein would step down, that Hillary Clinton would announce she would run for president in 2004 and that European equity markets would "badly lag the U.S. and Japan" (actually, they did better).

So what does Wien see in 2004?

1. Osama will be found.

2. The Fed holds short-term rates steady and the 10-year Treasury yield stays below 5 percent.

3. The S&P rises another 18 percent, to 1300 (that's the equivalent of about 12,400 on the Dow).

4. The mutual fund scandal abates.

5. The dollar makes a comeback against the euro.

6. "Pharmaceutical and other large-capitalization, higher-quality companies begin to outperform the market." (More on this below.)

7. The monarchy in Saudi Arabia is endangered, and oil prices rise above $40 a barrel.

8. Gold rises to $500, but silver becomes "the precious metal of choice."

9. The Japanese economy picks up steam, and the Nikkei rises above 13,000.

10. Dick Cheney drops off the ticket and is replaced by Bill Frist. Defense Secretary Donald Rumsfeld and his deputy Paul Wolfowitz resign, "saying their work is essentially done."

By the way, I agree with all his economic predictions (in fact, I see the Dow at 13,000 by year-end). I am skeptical about numbers 4, 7 and 10.

But let me focus on number 6. There, Wien makes as bold a prediction as I have seen in all my years of reading his client letters. He elaborates:

"Both presidential candidates proclaim the importance of new drug innovation in holding down escalating overall health care costs and argue that companies should be rewarded for their costly research."

Now, there is something I would like to see: a responsible statement from politicians about the value of pharmaceutical research in reducing consumer costs and improving health.

As it is, the drug companies have been under vicious attack from loads of Republicans and Democrats (though not from President Bush or his key health officials, like HHS Secretary Tommy Thompson and FDA Administrator Mark McLellan -- though it would be good to see them far more emphatic on the matter Wien raises). Attempts to allow re-imported drugs from Canada, for example, would surely lead to reduced research.

I don't know if Wien is right in forecasting that the presidential candidates would act responsibly on the pharmaceutical issue. But I certainly hope he is. The nation's health -- both economically and physically -- depends on it.


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