Five for ‘05

‘Tis the season for lists, predictions and “best of ‘04” type commentary.


This won’t be one of those.

Instead, I hope to provoke you into thinking about less obvious issues that got less ink/electrons, but are of no lesser importance. These below-the-radar issues have not been fully discounted by the market. As such, these issues still have the ability to surprise – and therefore, significantly impact prices.

1. FASB Option Expensing: June ’05:

One-quarter of S&P 500 companies have already begun expensing options. We do not yet know what tech firms will actually do when the rules are put into effect. I suspect that tech firms will either cut back on their generous option packages, or they will see their P/Es shoot up dramatically.

2. Job Creation Still Anemic: 

Employment growth is significantly below par 44 months into the recovery. The U.S. is net 7 million jobs <>. A disproportionate % of jobs come from the US government, rather than from the private sector – which is creating jobs that pay less and have fewer benefits than those that have been lost. Continued lack of organic job creation is a significant ongoing risk factor for negative for the economy.

3. Accelerated Depreciation Expires: 

The incentive to make capital ex purchases may add to a tech slowdown, as the "pull through" of 2005 sales (into 04) is felt. But it’s not all negative: The tax incentive to buy lacked an analogous tax incentive to hire. That boosted capex versus hiring. The disincentive to hire is gone, perhaps a pleasant hiring surprise awaits in 2005.

4. Rise of the Pure Patent Business Model:

Patent litigation in the U.S. is substantial and rising. High-profile patent suits will only accelerate in 2005. Why? The new business model: the pure patent play. Consider VC Intellectual Ventures, which has been creating and buying patents. The defunct Commerce One’s 39 Web services patents were auctioned off in bankruptcy to the unknown JGR Acquisitions for $15.5 million. I expect to see a slew of patent litigation from these (and other) players in 2005.

5. Terrorist Act Against the U.S. :

Military experts do not believe we have vanquished terrorism. We may have pushed some of the higher-profile elements underground, but have not yet eliminated it. As we get closer to that goal, we can expect some acts of desperation from the bad guys.

These are the under the radar issues which have yet to be widely discussed. I expect some (or perhaps all) of these may roil the equity markets in 2005.

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