Taking Stock / Hits and Misses of 2004

Continuing a long-standing tradition, today's column is dedicated to predictions for the new year.

Making predictions is a surprisingly enjoyable business. As a famous man once said, "it's hard to make predictions, especially about the future."

What's worse, we like to check back on the hits and misses of the predictions we made about the year just ending. It's a bit less amusing, and sometimes it's downright embarrassing. But, still, what else can we do?

So, here's a top 10 list of the predictions we made for 2004, together with what really happened.

1. Stocks: Our forecast was crystal clear - we remained optimistic even after the tremendous gains made in 2003. "If interest rates continue to decline, shares will necessarily rise." Indeed, interest rates fell (see paragraph number 3), and the markets rose a robust 20 percent.

2. Nasdaq: We wrote here a year ago that "The negligible interest rates of the U.S. Federal Reserve, which make holding cash frightfully expensive - are pushing Americans to shop and invest." American interest rates began to rise, but Americans are still buying stocks and going shopping. "In the long run," we wrote, "very unpleasant surprises could emerge from there." The long run has yet to arrive, but it's coming up, as we'll explain tomorrow.

3. Interest rates: the forecast was crystal clear. "The fiscal restraint that the finance minister is exercising, the [U.S. loan] guarantees that dramatically decrease Israel's risk premium and price stability - will allow the Bank of Israel to take additional steps this year toward lowering Israeli interest rates to western levels, say 4 percent or even 3.5 percent."

Right on target. The Bank lowered interest rates this week to 3.7 percent, the lowest ever.

4. Inflation: At the end of last year we wrote here that, "The Bank of Israel will lean more than ever toward a broad monetary policy - and therefore it's reasonable to assume that next year we'll see inflation pick up."

Wrong. The Bank of Israel did indeed consistently lower interest rates, but not fast enough. The worldwide collapse of the dollar pushed prices down, making 2004 another low inflation year at about 1 percent, below the governmental target.

5. Real estate: The prediction was that "After seven years of continuously seeing private home prices fall, it seems that in 2004 we'll finally see a turnaround or at least stabilization."

Our reasoning was that "The weak dollar, which pushed residential prices down last year, and the decline in mortgage interest rates are bound to encourage demand for homes. Don't expect steep increases, because the market is awash with sellers." As for commercial real estate, we predicted that it would be "hard to expect recovery - the excess in supply remains substantial."

In the first half of the year this prediction seemed on target. The market seemed to be reawakening, stemming the sharp slide of previous years. However, the depressed atmosphere returned in the second half of the year.

6. Stock and bond offerings: "This will be the year of flotations," we wrote here. "In 2003, it was primarily Nochi Dankner. In 2004, the rest of the business world will join him, first with bonds and later with stocks."

We nailed that one. The business sector raised NIS 14.5 billion from bonds and NIS 15. 8 billion from stock issues.

7. Growth: "If export growth continues there is a good chance of seeing the pace of economic growth pick up next year. The local market cannot return to the extraordinary growth rates of the 90's on its own," we wrote. Indeed, exports rose this year by 12 percent, and economic growth topped 4 percent.

8. Profitability: "We expect improvement here," we wrote. "The banks will benefit from the boom in the financial markets, and they will be able to increase provisions for doubtful debt, the results of their carelessness in the 90's, without significantly hurting their financial results".

Company profitability did indeed grow substantially. The banks were able to significantly reduce provisions for doubtful debts, and some of the largest exporters reported fantastic financial results.

9. Economic reforms: "To the degree that economic recovery continues, so the pressure to enact real economic reforms will decline." Regretfully, this prediction proved remarkably accurate. Port reforms were postponed once again, and reform of the banking sector is still stuck with Ilan Cohen and Joseph Bachar, who are supposed to produce a compromise to be brought to the Knesset.

10. Predictions: "This year, as last year, the economic markets will manage to surprise us," we wrote a year ago. "This year more than ever we will be influenced by the global and U.S. markets. Therefore, the best and worst of surprises could hit us quickly and powerfully from any direction".

Actually, there were not many major surprises in 2004. The U.S. economy continued to grow at a decent clip and Wall Street heated up, making predictions for 2005 seem particularly dangerous. Tomorrow, we will try to meet that challenge.