Happy New Year! The markets greeted the holiday season on a positive note.  As mentioned last month, US investment, political, and economic sentiment has maintained its positive turn. Government data continues to show strength in job creation, economic output, consumer confidence and orders for durable goods. None-the-less, even with this positive macro-economic swing, various sectors are trending along different paths.

Closed-end funds (CEFs) offer strong value at year end 2005 saw initial public offerings of 47 closed-end funds, significantly increasing the overall market capitalization of the CEF universe; however, expect 2006 to enjoy notably fewer new CEFs. Towards year end, many CEFs were relatively undervalued with lackluster price and net asset value returns for 2005.

High yield (HY) market still looks weak.  Even with positive economic signs, the high yield market continues to present a flood of worries to the market.   Investors are concerned that several factors will increase HY supply, widen spreads and drive down prices:

  1. continued strong new issuance of corporate HY debt
  2. fresh HY debt reaching the market from increased corporate takeovers, leveraged buyouts, and mergers
  3. potential headliner bankruptcies
  4. concern that private equity is piling too much debt on ever bigger buyouts

Low interest rates and abundant liquidity currently support these cases. The real test of the HY market will occur when financial conditions deteriorate.

Falling US Dollar may bode well for economy and foreign investments.  In early 2005, numerous prominent investors, including Warren Buffet, made sizeable and public bets against the US Dollar. Those investors, subsequently, lost money on their positions as foreigners poured money into US securities and consequently strengthened the US$. However, the Dollar has finally weakened towards the end of the year, and I believe that the Dollar will continue to depreciate into 2006. This will bode well for:

  1. US companies that sell their goods abroad
  2. Investors with foreign exposure

Look for currency moves in 2006 as well as strengthening gold prices as the precious metals may be seen as a currency safe haven.

International emerging markets are growth markets. Emerging markets (EM) have been “emerging” for several decades, but lately are assuming new prominence in the investment world as:

  1. An increasing number are earning investment grade credit ratings from Moody’s and S&P
  2. A structural shift in global asset allocation strategies is shoveling more money into EM

I expect this trend to continue through and beyond 2006. If there is an EM crisis, it would probably present a good buying opportunity rather than a secular shift in a positive trend.

Housing gossip remain a hot topic for economic forecasters and the media.  For 2006, the concern is that the slowdown in housing along with the rise in short term interest rates could stifle consumer spending. Seems that everyone has agreed that the volume of housing sales will decline in 2006, however, there is not general agreement on which direction housing prices will go. Although inventories may increase, I believe that unless there is a local recession or sharp upturn in unemployment, housing prices will not suffer meaningful declines.

Next Steps: Expect US companies to do well, even in the face of disastrous events.  US companies (and investors) are awash in cash. Expect companies to use some of their cash for expansion as well as technology purchases and upgrades.

  1. Look for global US companies to benefit from cheap capital, a low dollar and revenue growth in the Emerging Markets.
  2. A new spending cycle should bode well for suppliers and the entire corporate service industry.
  3. Don’t expect hurricanes Katrina and Rita… to be an anomaly. Weather forecasters predict that hurricane seasons will be more active than usual for at least another decade.

Economic and spending cycles should bode well for US equities.


Greg P. Pellizzon
Managing Director

Michael Ashley Schulman, CFA

Hollencrest Capital Management