Granite Group Advisors -


2005-01-01 :: 2005 4th Quarter Commentary

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Looking Back

The fourth quarter was a general repeat of last year’s action. October saw a dramatic sell off in the market followed by a quick upsurge in November that basically gave us all of the market returns for the year. December started off relatively quickly to the upside but then petered out as we approached the Holidays. Once again Small Cap and Mid Cap led the way in the US, and International stocks were the complete winner for the year. Diversification in all these asset classes kept risk in check and kept portfolios slightly up prior to the upsurge.

Fixed income yields remained relatively the same as they began the quarter. Wall Street believed the fed would continue raising rates, causing an artificial rally, which has proven to be incorrect and therefore came back down by the end of the quarter. As we have stated in previous issues, the 10-year yield would not rise to Wall Street’s lofty expectations.

Hedge funds followed the equity markets relatively closely this year. Most of the returns came in the last half of the year in the absolute return funds, while some single strategy funds were able to play certain markets and severely outperform the general market indexes.

Real Estate bounced back a bit from its dramatic sell off at the end of the 3rd quarter but remained lower, especially in REITS, where we have finally seen the down turn that was generally expected.

Commodities, specifically oil and gold, had record upturns in the markets. We were wrong to believe that China would come off a bit thus freeing up capacity to other parts of the world.

Looking Forward

Looking forward we are relatively bullish on equities for 2006. There are many factors to look at, both good and bad when making this forecast. On the negative side we have higher interest rates, higher oil and commodity prices, a slowdown in the real estate markets, high debt for both the consumer and the government as well as the anticipation of a general slowdown in the economy. On the positive side we have the possibility of an end to the interest rate hikes, Cap Ex spending by corporations, which creates and enormous opportunity for M&A activities. Additionally there is more cash on the books from corporations than we have had in decades. Company’s earnings grew at quite a substantial rate in 2005, the markets did not really follow with performance. We believe that Large Cap and International Value stocks will outperform their smaller constituents, and assuming our government continues on its course, dividends again will be important.

We expect bond yields to rise moderately, but do not see any real opportunities of higher returns in the fixed income markets. Only protective and income oriented allocation choices would make it necessary to put any new money to work in this asset class.

Real Estate will continue to soften. The long, slow downturn has begun.

Absolute return hedge funds will continue to be more important than fixed income and be a better choice than debt at this time. Absolute hedge fund of funds will continue to do better on a risk return basis than their counterparts.

Last year we were somewhat bearish on commodities, based on our expectation of a slowdown in China. We believe this will finally come to fruition and slow down demand.

Again we think 2006 will be a great year for equities. We can expect mediocre returns at best in the fixed income markets making them less attractive than absolute hedge funds.

We look forward to a great 2006!

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