This column was originally published on RealMoney on Jan. 12 at 9:58 a.m. EST. It's being republished as a bonus for TheStreet.com readers.It's not too late to reflect on the past year and plan for the one ahead. I'm going forward in 2006 overweight in consumer staples, energy and basic materials, and underweight in everything else. Consumer staples cover the bear case; energy and materials cover the bull case. Financials, which are dependent on interest rate margins, will have a hard time. In insurance, I think that large-cap life names such as MetLife ( MET - Get Report) and Prudential ( PRU - Get Report) will pack a punch. Scale is an advantage in the life insurance business. Allstate ( ALL - Get Report) is undervalued, and its pricing model is more powerful than the market thinks. Assurant ( AIZ - Get Report) is one of those companies that everyone will wish they bought at the IPO. It is a very good capital allocator. Beyond that, the property and casualty reinsurers in Bermuda are undervalued, but who can tell how bad the catastrophes will be this year? I am getting more hesitant about the group. In bonds, I think the yield curve will be flat to inverted for a longer time than most anticipate. In general, short rates will rise, and long rates will stay pretty stable. The federal funds rate should top out at 5%, give or take 25 basis points. Credit spreads will remain tight for most of the year and widen a little toward the end of 2006 on fears of recession and consumer credit problems. There won't be stagflation in 2006, but growth in real GDP will slow, and inflation should rise a little. Toward the end of the year, news stories about a likely recession will proliferate, partly due to a weakening of the residential real estate market. My guess is that on the whole, the stock market won't perform too badly, but the indices will only see single-digit gains. It won't make either the bulls or the bears happy. That's my forecast for 2006, but the future is difficult to predict. My investing is conservative, and I don't take my macroeconomic views to their maximum, because macro views sometimes fail. Good investing takes the likelihood of error into account.
Looking Back at 2005Humility is a huge plus in managing money, because it keeps us from becoming wedded to ideas that have lost their punch. For that reason, I find it instructive to reflect on my failures last year. In the insurance sector, I was bearish on AIG ( AIG), Ameriprise Financial ( AMP) and St. Paul Travelers , and I was too bullish on Montpelier Re ( MRH). There's no common factor here -- I simply misunderstood the fundamental cases, at least in the short run. I was also wrong about auto-parts maker Dana . I broke my own rule by buying a company of medium-to-low credit quality when the industry as a whole was under stress. Along with all of that, my commentary was too bearish on equities, too bearish on the dollar and too bullish on the 10-year note. Regarding currencies, read the work of Marc Chandler. He clearly has a firmer view of relative value in currencies than I do.
|My Worst Sectors |
Gains and losses are expressed as the percent that they changed the returns of my portfolio as a whole
|My Worst Investments |
|Fresh Del Monte Produce||-0.7|
Best of 2005On insurance, I was in the money with MetLife, Prudential, Assurant and Montpelier. There are three ideas here. First, scale is an advantage in insurance, and that helps Met and Pru. Second, Assurant is a well-run corporation. It is my hedge fund's largest holding. I shorted Montpelier after Hurricane Katrina (along with other property-exposed reinsurers), and recouped my losses. (I try to report all of my significant trades on RealMoney, but my agreement with my legal department precludes reporting companies that I am short, unless they allow my disclosure.) I also got Fannie Mae right, and I am no longer short. I had the auto sector right, where I like Toyota ( TM - Get Report) but not General Motors ( GM - Get Report) and Ford ( F - Get Report). I feel sorry for Kirk Kerkorian, but it's foolish to follow the actions of wealthy people simply because they are wealthy. The stock market doesn't care who owns a stock, but it sometimes cares why large investors buy and sell. Unless GM can figure out a clever way to legally spin out GMAC, I can't see how GM is buyable. I predicted the yield curve inversion well in advance of most commentators. My strategy of barbelling fixed-income investments for 2005 worked very well. The long end rallied, and the short end fell. My trading of the iShares Lehman 20+ Year Treasury Bond ( TLT) also worked out in 2005. I made money in each trade. What is gratifying here is making money in an unusual environment. Long rates were low due to foreign investment. I was ahead of the curve on:
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|My Best Investments |
|Canadian Natural Resources||2.0|
|Anglo American Plc ADR||1.4|
|Japan Smaller Capitalization Fund||1.2|