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Lane Asset Management Commentary September 2012

Lane Asset Management Commentary September 2012

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Published by Edward C Lane
Economic and stock market commentary for September 2012
Economic and stock market commentary for September 2012

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Published by: Edward C Lane on Sep 10, 2012
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Economic and Market Recap
Do you want to be depressed? Here’s a brief 
(and selected) recap of economic develop-ments since my last report:
Q2 GDP growth was only 1.7% annualized
Nonfarm payrolls increased only 96,000 inAugust and restated July NFP was loweredto 141,000 (from 163,000)
Corporate profits (adjusted) rose 0.5%
The labor force participation rate fell to a30 year low
Consumer confidence fell sharply
The Eurozone Purchasing Managers’ Index
declined to its lowest value since June 2009
U.S. new export orders have fallen to a 3year low
Gasoline prices reached a 3-month high.Yet, as shown below, the markets had a pretty
good month. Why? Well, you’ve probably
heard that the ECB has put forth a plan to buyEuropean sovereign debt to maintain
“acceptable” interest rates.
Does this solve the financial crisis (excessivedebt and unemployment)? Not hardly. But itdoes reinforce the notion that Europe is com-mitted to save its currency and work its waythrough the crisis.
Stock Market Commentary
September 9, 2012
Lane Asset Management
How is it that I can becautiously optimisticabout the stock market while we have suchseemingly insurmount-able headwinds as up- wards of 20% of un
andunder-employment, over $16 trillion of U.S. fed-eral debt, maybe an-other $1 trillion of stu-dent loan debt, andnearly $49 trillion of sov-ereign debt worldwide(according to TheEconomist)? The answer is that I believe those who benefit most fromeconomic growth will ul-timately find a way to besuccessful through somecombination of industrialingenuity and politicalpressure, just as theyhave in the past. As theprocess unfolds, we arelikely to live through arocky period. The prob-
lem is that we just don’t
know how long that pe-riod will last.Not to be outdone, in the face of weak payrollnumbers in the U.S., the S&P 500 reached an all-time high. Why, you ask again? Because, at leastfor the moment, this gave impetus to the feelingthat the Federal Reserve will continue some formof monetary easing, weakening the dollar andboosting asset prices and, potentially, exports. While I do believe global economic recovery willhappen (on account of the political pressures, if nothing else), it is not at all clear what economictraumas we will go through in getting there. And, while I do see a path for resolving enormous sover-eign debt loads, I believe the high unemployment inEurope and the U.S. will be a much harder problemto solve.Investment Outlook As discussed on the following pages, technicalanalysis on U.S. and international equities is givingmixed signals. Accordingly, for those lacking in ahigh degree of risk tolerance, I continue to believein taking a cautionary approach to investing by fo-cusing on high quality, dividend paying, U.S. equi-ties, preferred stocks, investment grade corporatebonds and municipal bonds. If the market contin-ues as it has so far this year, this strategy will lagthe market. On the other hand, the strategyshould hold up over time, minimize volatility, andproduce an acceptable absolute return.
The charts on this and the following pages use exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly. The ETFsare chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses for these ETFs canbe found with an internet search on their symbol. Past performance is no guarantee of future results.
SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is noguarantee of future results.Page 2
Lane Asset Management
Last month, despite a positive technical outlook, I urged caution on the S&P 500 owing to concerns aboutEurope. While I believe the concerns were appropriate considering the uncertainties, in retrospect, theyproved to be unnecessary with the index gaining 2.5% in the month. Once again, while the technical outlook trumped the fundamental, I still believe it prudent to keep the macroeconomic environment in mind.So, what are the charts telling us today? Despite the strong beginning in September, I see warning flags. While the price trend is still positive, price is running up against a new level of resistance at $145. More concerning is the
action on the “fast”
MACD (the first subchart) and the Full STO (the bottom subchart) where both indicators are showing the potential for a reversal similar to what occurred in May 2010 and early/mid 2011. On the other hand, the market fundamentals, at least on a short term basis, are not so bad withnew sovereign bond buying support from the ECB in Europe, anticipation of further easing from the Federal Reserve in the wake of weak job
numbers, and strengthening of home prices. While I’m optimistic on a long term basis, the developed economies still have not
figured out how
to address serious debt and unemployment. Although this analysis is overly simplified, I’m still recommending caution for eq
uity additions.
S&P 500
VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. Past performance is no guarantee of futureresults.Page 3
Lane Asset Management
Last month, based on the technical analysis, I saw no compelling reason to add international exposure.Then along came Mario Draghi, president of the ECB, who promised at the beginning of the month to do whatever it takes to support the Euro and followed through with an announcement of a new sovereignbond buying program in early September 
giving a shot in the arm to international stocks both times(see the chart on page 1). For the month, these actions by the ECB overshadowed larger problems in theEurozone of declining business activity and high debt and unemployment. That may not last.So, despite the 6% gain in VEU since the beginning of August, I see a challenging technical outlook for the index. The price is bumping up against
resistance at $44, the “fast” MACD (the first subchart) is showing the beginnings of weakness and the Full STO (bottom subcha
rt) is givingstrong indication of reversal. Accordingly, I still recommend being highly selective in international equities and caution overall.
All-world (ex U.S.)

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