10 Surprises Part II

The last five prognostications for 2006.

Please remember that these surprises are not intended to be predictions, but rather events that have a reasonable chance of occurring despite the general perception that the odds are very long. Again I prefer the term for these as “possible improbable” events.

6. Microsoft’s pending release of its Longhorn (recently renamed Vista) operating system sparks a major and unexpected rise in technology stocks. This is particularly seen in the 2nd half of the year. Technology begins to significantly outperform the market starting in early spring and this carries over through the end of the year.

7. There is no major real estate decline (with the exception of a few over built highly speculative areas). The American consumer continues to spend and muddle along. The Federal Government is finally forced to admit that its measurement of inflation is hopelessly out of date and inaccurate.

8. US economic growth continues at a 3-4% rate. The reconstruction of New Orleans is placed “off book” ala the Resolution Finance Corp in the early 90’s. Tax receipts come in higher than expected. The Federal budget deficit's growth slows. President Bush announces a new timetable for troop withdrawals from Iraq in his State of the Union address. He will significantly accelerate this in the fall {see #4}. This surprise move on troop withdrawals comes from significant progress in Iraq and to political necessity at home. {See #9}.

9. Taking a page out of the 1994 Republican playbook, the Democrats reinvent themselves with their own version of the “Contract with America”. In it they list specific proposals to deal with healthcare, Social Security, new programs for the middle class, energy and the environment. This plus increased dissatisfaction with the war in Iraq and President Bush’s policies lead to a Democratic takeover of the House of Representatives and narrows the Republican majority in the Senate. Illinois Representative Rahm Emanuel is elected Speaker of the House. Al Gore emerges as a major contender for the 2008 Democratic presidential nomination. Hillary Clinton is significantly weakened among her base for what is perceived to have been her hawkish stance on the war.

10. The stock market stages a explosive rally at the beginning of the year and posts its best showing in the 1st Quarter of 2006 since March-May of 2003. Many of the above stated events catch up with equities during the spring and the market has a flat showing in the 2nd Quarter. The market gives back much of its gains in the summer months and loses an additional 3-5% during the fall Iranian crisis. It then stages a massive rally and ends the year with its best returns since 2003.

Surprise Pick #11. Notre Dame Fighting Irish go 12-0 including a 31-3 dismantling of Penn State on September 9 in South Bend and a surprisingly easy win over USC at the end of the season. The Irish win the national football title by prevailing in a Fiesta Bowl rematch with Ohio State on a last minute touchdown pass from quarterback Brady Quinn to wide receiver Jeff Samardzija.