Jan 1, 2005 12:00 PM

, By Michael E. Lewitt, president of Harch Capital Management Inc., Boca Raton, Fla.

By Michael E. Lewitt, president of Harch Capital Management Inc., Boca Raton, Fla.

The year 2004 wasn't one in which to take chances; and 2005 is shaping up the same way. The global economy is dependent on two commodities: oil and the U.S. dollar. Throughout 2004, the prices of both moved in the wrong direction for American businesses. By early December, the Euro was trading above $1.30 against the dollar, and oil had been trading above $40 per barrel for weeks. How these prices play out in an economic environment characterized by globalization and deflation will dictate the direction of markets during 2005. (See “Wrong Directions” on p. 52.)

In 2004, markets suffered from a dearth of opportunities. One of the most significant trends was the continuing flood of money into hedge funds just as these investment vehicles struggled to produce positive returns. Strategies that depend on market volatility, such as convertible arbitrage, had a particularly tough time generating decent returns. Stocks moved sideways through election day, then enjoyed a post-election rally. The election of President Bush to a second term was generally viewed positively by the financial markets, although a great deal of concern was expressed about the bulging federal budget and current account deficits.