Yvonand Beach

a serious (sorry guys :-) website clearly states the IOB as the event to watch out for in 2006.

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They publish a market outlook report (pdf) for 2006 that you can access here which includes a paragraph on : 2005 review continued and outlook for 2006.

a very interesting article indeed that makes our point:

I cc here the main parts for our point (the rest is very technical), the IOB and the threat it represents:


Snapshot of December

As of January 14th, with 2083 individual funds having reported
December performance, the HFN Hedge Fund Aggregate Average
outperformed the S&P 500 gaining +1.43% vs -0.10%. For the
year, the Hedge Fund Aggregate was +8.62% while the S&P was
+3.00%.

Japanese equities were once again one the most influential asset
classes driving returns in December. The HFN Asia Average was
+4.98%, again almost double return of the HFN Europe Average
of +2.99%. Combined with strong returns from Russia and India,
the HFN Country Specific Average was the leading single strategy
average, +7.94%.

A rebound in oil prices above $60 was a catalyst for another
impressive month for funds in the HFN Energy Sector Average,
+4.28%. Causes for the rise were supply shocks which included a
pipeline fire in Nigeria, ongoing tensions in Eastern Europe over
dependance on Russia as the regions main supplier, and concerns
with Iran's path of nuclear development.

Major Events and Topics of 2005 and a Look Forward

Energy/Oil

Energy was the number one story for the majority of the year and
the HFN Energy Sector Average ended 2005 +24.87%. One very
important factor about the energy industry which became
increasingly visible is the fragility of the supply side of the
equation for both oil and natural gas. Additionally, the US
dependence on importation will have significant economic
implications for 2006.

Iran, with it's oil and gas capacity, poses a large threat to the
economic stability of the US. Currently Iran has the third largest
oil reserves behind Saudi Arabia and Canada (although Canada's
reserves are largely in the difficult and expensive to extract form
of oil sands) and second largest natural gas reserves behind
Russia. The threat is in the form of the Iranian Oil Bourse (IOB) which is Iran's attempt to have its energy related commodities traded with the Euro as the base currency. Currently the US dollar is the currency in which oil is bought and sold in world markets.

Should there be a shift towards a "petroEuro" for this process, the result could be a global decrease in demand for the dollar and result in less demand for dollar denominated assets. The IOB is currently expected to go online in March 2006.

The question mark is how does the US prepare for, or prevent this situation.

Currently, there are a lot of major news stories focusing on the Iranian nuclear strategy. An action against nuclear development is a lot easier to swallow than action to protect a delicate currency/economy. Should events escalate with Iran we could easily see another supply shock driven spike in energy prices similar to the early fall of 2005. Compound this with the facts that the US infrastructure is still not fully functional in the Gulf and the possibility of another volatile hurricane season and some industry predictions of oil averaging in the low $50's for 2006 could be quite low.

Should this scenario occur, the HFN Energy Sector Average could have another year like 2005 and funds with significant assets outside the US like those in the HFN Europe and Asia Averages would outperform as well.

All year there had been talk about the US treasury yield curve inverting. Finally in December the 2year yield rose above the 10year. Accompanying this process has been talk of how such an inversion has historically been followed by a US
recession. One major difference in why this crossing may not necessarily be the harbinger it has been is that there are significantly more assets suppressing the 10 year yield now than in the past. One reason for this is the lack of an on-therun
30year bond combined with the size of the mortgage backed security (MBS) market.

In times when mortgage refiancing is high, as it was in 2005, payment streams of MBS are effectively shortened and the response from MBS managers is to purchase longer term securities, treasuries, in order to increase the duration of their
portfolios.

In late February the treasury will be reintroducing the 30 year bond which possibly can help steepen the curve and reduce refinancing. HFN Averages whose funds benefit from a more normalized curve environment should do well if this occurs including the HFN Finance Sector, and Capital Structure Arbitrage Averages. Granted, with a new Federeal Reserve governor soon to take control and speculation as to when short term rate increases will actually cease, there should be plenty of volatility in the early first half of the year.... " and the report goes on...


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