With the high spirits and good cheer of the holidays comes the overwhelming temptation to regress to clichés. We have been Bullish since late October - call it nice – and Mr. Market has rewarded that perspective. In the vernacular of the season, what might make our views naughty?

We believe it healthy to ponder what might cause major trends to reverse themselves. In other words, how might the Grinch come to Wall Street?

Here’s my short list:

Oil: In our opinion, crude will be a similar story in 2005 as it was in ’04. Oil bears have used every excuse from an alleged $15 terror premium, to the mild weather, to a slowing (?) Chinese economy. All was to no avail. Despite the Ursa viewpoint, we expect Oil to be above $35 next year, and very likely to stay over $40 – or higher.

Retail: Is the consumer finally showing signs of exhaustion? Holiday retail sales have been disappointing, with traffic and revenue below expectations. At the same time, home refinancings has been slowing down. Coincidence? Hardly. With Luxury goods sellers still strong, its more likely that consumers – at least those below the top tax brackets – have been funding their buying sprees via home equity loans; Expect much less of that in 2005.

Inflation: Firms continue to be squeezed by demand-driven prices of raw materials. Its troublesome that companies find it nearly impossible to pass price increases on to consumers. With nearly all of the easy efficiency gains already achieved, and the pace of productivity improvements slowing, broad pressure on margins remain a potential threat to increased corporate profitability.

Jobs: Continue to be the weakest aspect of the recovery. With the election behind it, the White House has (finally) ratcheted back their expectations for job growth. Without some significant improvement, however, it is hard to imagine the expansion continuing at the same modest pace.  Without organic job growth, the expansion will stumble.

FASB: New rules requiring full expensing of options will not take effect until the 1st reporting period after June 15, 2005. How firms respond to this issue may determine the fate of the Nasdaq. Do nothing (fully expense options) and risk watching P/Es skyrocket; Stop issuing them and it becomes harder to recruit top people. That’s the choice facing many tech companies.

What’s a profitless firm to do?

These macro concerns for 2005 do not take into account other troublesome issues, such as overly bullish sentiment, an overbought market, and high levels of complacency.

And we’ve been Bullish! Imagine what the Bears must be thinking . . .

Category: Markets

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