AD Quality Auto 360p 720p 1080p Top articles1/5READ MORERose Parade grand marshal Rita Moreno talks New Year’s Day outfit and ‘West Side Story’ remake160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! Stock-market strategists, analysts and traders are busy trying to anticipate the market’s moves in 2006 and figure out where the big money will be made. But before assessing their latest predictions, it’s worth remembering that even the smartest minds on Wall Street can get it wrong. It often is helpful to understand why. A year ago, for example, Tobias Levkovich, Citigroup’s top stock-market strategist weighed in with his prediction: “The shift to large-cap [stocks] did not pay off in 2004…We think it will in 2005.” Mr. Levkovich argued that the largest companies had stronger balance sheets than small companies and also that their shares traded at lower prices relative to company earnings. Close, but no cigar. So far this year, the Dow Jones Industrial Average, one measure of large-stock performance, has risen just 0.9%. The Standard & Poor’s 500-stock index, another barometer of the biggest stocks, is up 4.6%. The Russell 2000 index, which tracks small stocks, has gained a bit more: 4.8%. Giants May Shed Flab What went wrong for largestock boosters? Small stocks generally do better while the economy is ramping up. And the economy’s momentum continued in 2005, despite predictions that things would cool down as the Federal Reserve raised interest rates. As a result, earnings and revenue growth have been better for smaller companies than for larger ones. At the same time, the dollar was strong all year, reducing investors’ appetite for the shares of big U.S. companies that get a significant portion of their earnings in foreign currencies. But Mr. Levkovich again is saying that large stocks will rule in 2006. And this time, many more investors are on board, including some large hedge funds that have shifted into large stocks in the last month or so, helping these stocks lead the market higher recently. “Admittedly, large-cap-oriented investment strategies have not worked thus far,” Mr. Levkovich acknowledges. But giant stocks haven’t been this cheap relative to small stocks in 20 years in relation to expected earnings of both categories, according to Citigroup. Larger companies also have built up a hefty amount of cash and are beginning to take steps to give it back to investors through share buybacks and dividends, all of which could help these big stocks rise in the next year. “With strong free cash flow and clean balance sheets, these companies seem poised to provide higher payouts,” Mr. Levkovich says. Here’s another prediction that went awry in 2005 but may come true in 2006: weakness in the U.S. dollar. The U.S. dollar scored a 7% rise this year versus a basket of foreign currencies, according to Merrill Lynch. One reason the dollar did so well: the Fed kept boosting interest rates, even as foreign central banks sat on their hands. That encouraged global investors to shift into dollar-based investments. And uncertainty in Europe, including youth riots in France, didn’t help the euro. At the same time, a change in U.S. tax law allowed U.S. companies to bring home over $200 billion of locked-up profits from overseas at a lower tax rate, which they converted to dollars. Meanwhile, many oil-producing nations used their bursting coffers to buy dollar-denominated investments. Dollar Could Still Weaken But the Fed may be close to its last interest-rate increase, according to economists, while foreign central banks might move their rates higher, helping those currencies rise against the dollar. The dollar’s rise was “arguably one of the big surprises of 2005,” says David Rosenberg, a Merrill Lynch economist. But “the greenback’s longer-term bear market will likely resume in 2006.” A falling dollar would help U.S. companies that export goods, by allowing those companies to pocket more-valuable foreign currencies and by making their products more competitive against those of foreign rivals. Foreign stocks and international- stock mutual funds also would be aided by a falling dollar, as U.S. investors get more dollars when they translate their overseas gains back into our currency. Continued growth in emerging markets also would benefit some non-U.S. companies, such as ICICI Bank (IBN in U.S. trading), the second- largest lender in India. Earnings at the Indian bank are expected to double next year, but the stock trades at a reasonable 17 times next year’s expected earnings and has a 2.5% dividend yield. Some analysts like Renaissance- Re Holdings (RNR), a big global reinsurance and insurance provider whose shares trade on the New York Stock Exchange. Shares have fallen about 13% in the past year and there’s been turnover in the executive ranks. But analysts have raised earnings and sales estimates in recent weeks and the stock trades at a skimpy six times next year’s expected earnings. An end to the Fed’s interestrate boosts could kick-start a stockmarket rally in the U.S. One likely beneficiary: Franklin Resources (BEN), parent of mutual-fund manager Franklin Templeton Investments. Analysts expect the company, which has been expanding its assets, to see earnings rise 20% next year. But its shares are trading at just 18 times next year’s expected earnings, below some competitors. Further, 40% of Franklin’s assets are in foreign-stock mutual funds, so weakness in the dollar would make them attractive. Housing Ebbs, Tech Revives Here’s another long-running prediction that seems to finally be coming true: a falloff in the housing market. Experts predicted it a year ago, and for much of 2005, housing prices kept rising. But lately the housing market has slowed, which in turn is likely to keep a lid on consumer spending in 2006, and weigh on the economy. That could affect many consumer stocks, especially those that depend on discretionary spending, as well as many real estate investment trusts, or REITs. One last prediction for the new year: a rise in capital spending by corporations in areas including technology and new plants. Technology stocks would clearly benefit. “The combination of strong growth from enterprise spending coupled with attractive valuation points toward the information-technology sector delivering the best returns in 2006,” says David Kostin, a Goldman Sachs analyst. Hewlett-Packard (HPQ), Solectron (SLR) and Tellabs (TLAB) are tech and telecom stocks with more cash than debt on their balance sheets and good prospects for the next year, according to analysts.