Look back shows column's best predictions

Sally was three years younger, didn’t have a license and probably couldn’t read a map. Her tendency to get motion sickness meant that she would be given a Dramamine before we pulled out of the driveway in the early hours and would be asleep until mid-day.

If she was going to sleep all the way to Florida, why not give her a permanent assignment to that little fold-down, chin-on-your-knees, torture device?

But n-o-o-o-o, Dad always used the same statement to counter my (I believed) irrefutable logic about equitable seating rights with, “You know where we’re going, so you can see where we’ve been.”

So although none of us knows for certain where we are going, let’s take a look back and see where we’ve been and whether what we prognosticated actually happened.

January ’04: “We expect that many investors will become disillusioned with mutual funds and begin shifting monies into managed accounts and exchange-traded funds.” It happened, as evidenced by Barclay’s iShares having the third highest net inflow of the fund groups.

February ’04: “Don’t forget international investments, an area that, as it has limited correlation to the U.S. markets, can produce good results when our domestic markets (falter).” We hit this one on the head, as world stock markets taken as a whole (excluding the United States) were up over 19 percent, led by Mexico in the Americas (+46.9 percent), Austria in Europe (+57.4 percent) and Indonesia in Asia (+44.6 percent). Even (ugh!) France with its 7.4 percent return beat the U.S. Dow Jones Industrial Average (+3.15 percent).

March ’04: We wrote about mutual fund transgressions and said, “You’ll also be hearing about a practice that is not disclosed in the sales literature: mutual funds ‘buying shelf space.’ There are brokerage firms that place certain mutual funds on their select list for a fee. The salesperson’s commission is usually higher for selling these select list funds, which creates a situation in which a salesperson’s objectivity could be called into question.” This may have been our best call, although it barely qualified as happening in 2004, not hitting the major media until the last week of December, when the Edward Jones $75 million settlement with the SEC hit the wires. There is more to come with this one.

April ’04: The Business Week cover with the headline, “Where Are The Jobs” was pointed out as likely to be an indicator that job growth was about to start and would disarm one of the liberals’ political talking points. Hate to sound boastful, but we were right.

May ’04: This one we missed. Long-term interest rates did not rise in ’04 as we expected. Short-term rates did, but not long rates. Although we hold with our position that investors should address their portfolios in terms of rising rates, we were early with our recommendation.

November ’04: Stocks versus bonds to combat inflation. Hmmmm, the jury is still out on this one. We recommended three issues that had been under selling pressure: Merck, Bristol Myers, and Washington Mutual. Our rationale was that their current dividends coupled with their expected dividend growth rates made them more attractive for the longer term investor than owning Treasuries.

So far, so good, as the three issues are trading above the prices at which they were recommended; however, three months do not tell the tale, as our definition of long term exceeds this short a period. The holding period to which we referred is 10 years, the same as the maturity on the Treasury to which the issues were compared. We stand by the recommendation, although readily admitting that the media and legal profession’s witch-hunt among the pharmaceutical companies will not be disappearing soon.

And what of 2005? Your guess is as good as mine, but that fact has never deterred me from taking a stab at it.

Interest rates will finally start rising at the long end of the yield curve, as investors realize that the Fed is serious about fighting inflation and supporting the dollar. Rising rates will slow the economy, resulting in GDP growth below the 3.6 percent current consensus. (My guess is 2.5 percent to 2.75 percent. For what you should do under this scenario, check out my May 16 column in the SBJ Web site archives.)

The mutual fund investigations will reveal addition Wall Street firms that have employed mutual fund sales activities that have not been previously disclosed to their clients.

In spite of headlines that shout about the falling dollar, it will actually strengthen from current levels. (It had better, or my planned visit to Scotland will cost 25 percent more than my trip there in 2001.)

Nanotechnology will be the buzzword. New issues will come to market that will try to capitalize on the concept, and these will be wildly oversubscribed, awakening the greed of those that got caught up in the dot-com bubble, driving prices to totally irrational levels. Watch out for this one.

The mutual funds that were the best performers in ’04 will not be at the top of the performance list for ’05, disappointing those who bought them based on last year’s numbers.

Social Security privatization will not be passed. Tort reform will. Most Americans will prefer a flat tax, but Congress will give it short shrift, preferring to tinker at the margins rather than scrap the old and bring in a workable, equitable method of raising revenues.

It should be an interesting and challenging year.

Clark Davis is a 34-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.