L a n e A s s e t M a n a ge m e n t

January 1, 2013 Happy New Year

Market Recap for December 2012
Happy New Year and welcome to my annual year-end summary and fearless forecast for the coming year. The number 13 is normally associated with being unlucky. Since the recession began in 2008, investors have been reluctant to make a major commitment to equities, present company included. Meanwhile, the S&P 500 (with reinvested dividends) has advanced over 100% since that time, reaching an all-time high last Fall. So, the unlucky thing was that some of us missed that ride. But is the ride over? Not if you listen to the majority of market strategists today. And not if you agree with my forecast in this Commentary. That said, we continue to live under the dual cloud of high debt and high unemployment. How those issues are handled by politicians here and in Europe will define our long term performance. Best wishes for a healthy, happy and prosperous New Year. Ed Lane

2013 Forecast and Stock Market Commentary

fore, the S&Ps near 14% advance in 2012 could be seen as a normal catch-up for the underperformance of the prior year. Below is a 65-year exponential chart of adjusted after-tax

As shown in the top chart on page 3, this was a strong month for international equities while it appears that performance for U.S. equities was constrained by the ebb and flow of the fiscal cliff discussions. Note how investment grade corporate bonds acted as a counterweight to the S&P 500 (SPY) during the month. Its interesting that gold lost over 3% during December despite concerns about the fiscal cliff and weakness in the dollar. Ill speak more about gold in the 2013 forecast but this illustrates the unpredictability of gold in my book. Recap for All of 2012 We live in interesting times and 2012 proved to be another interesting year. Despite concerns about the fiscal crisis in the U.S. and Europe and despite extraordinary public debt and unemployment in the U.S. and Europe (and Japans high debt), both the domestic and international equity markets had double digit gains as shown in the chart at the bottom of page 3 and so did investment grade bonds. How did this happen? I think the U.S. equity gains over the year can be traced to several key factors: 1. Corporate profits Earnings growth for the S&P 500 in 2011 was up about 15%, yet the S&P 500 index was essentially flat for that year. In 2012, reflecting a modest but steadily improving recovery, from Q3/2011 to Q3/2012 (the latest data available), U.S. corporate profits increased about 7.5% (closer to 9% for the S&P 500 according to Goldman Sachs). There-

U.S. corporate profits. This is the long term driver of equity returns, so keep this in mind when we talk about the 2013 forecast. 2. Central bank support Since the financial crisis began in 2008, central banks in the U.S., the U.K., Europe, Japan and China have tripled or quadrupled their balance sheets to an approximate total of $15 trillion. Following a 16% drop in in-

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2013 Forecast and Stock Market Commentary
ternational equities in the second quarter of 2012, the ECBs presidents comment to do what it takes to protect the Euro drove prices of international equities up over 25% from that point and over 16% for the year. 3. Interest rates Along with monetary expansion, low interest rates in the U.S. fueled the demand for higher risk assets despite concerns about the economys overall health. After rising to about 2.4% last March, the 10-year Treasury bond rate dropped about 25% from that point to about 1.75% by year-end. It seems a bit incongruous that investment grade corporate bonds would have had a double digit year in the same year as equities, but there you have it. Here I see the causes as: 1. Interest rates While Treasury rates declined in significant fashion, investment grade corporate bond rates came down only slightly. This increased the spread between the Treasury and the corporate bond rate, pulling investors into corporate bonds as they sought to maximize return with no significant increase in risk. 2. Investor demand Still shell-shocked investors poured $250 billion into bond funds in 2012 while equity funds lost $130 billion (a process that now seems to be reversing). Beyond the U.S., international equities did much better than expected, at least by me. Across the board, international stocks lagged the U.S. for most of the year (this is as I did expect) but then finished higher primarily, I think, on account of the fiscal cliff uncertainties in December that held beck U.S. equities. Among the countries that outperformed the U.S. were:

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South Korea, China, India, and Singapore in Asia, and Mexico in Latin America (I wonder if Brazils significant underperformance will reverse in 2013)

Interestingly, emerging market bonds not only outperformed investment grade and high yield U.S. bonds, but they outperformed the S&P 500, as well. There was little discernible difference between U.S. investment grade and high yield bonds based on respective index-related funds. Against this performance for equities and bonds, gold wavered throughout the year, finishing up about 5% (less than half its high for the year but well above gold miners which finished the year down about 11% according to one related ETF index). Based on the index-related ETF, oil actually fell about 10%. My suspicion is that this was due to the global slowdown and recessionary concerns since the dollar was basically flat against developed economy currencies while falling against Asian currencies one would expect that a decline in the value of the dollar would result in an increase in the price of oil. (Please note that performance results for exchange-traded funds (ETFs)

Germany, Belgium and France in Europe

L a n e A s s e t M a n a ge m e n t
December and All of 2012

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As you view this chart and on the following pages, note that exchange-traded funds (ETFs) are used as proxies for the indicated market indexes since indexes cannot be invested in directly. ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses on these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.

L a n e A s s e t M a n a ge m e n t
2013 Forecast and Stock Market Commentary
I begin with a brief forecast of economic conditions followed by a forecast of stock market performance. The Economic Forecast for 2013 The principal economies driving performance of investment markets are: Europe, the U.S., China, Japan, and Emerging Markets (especially Latin America and Asia/Pacific). The first thing to keep in mind is that the performance of the To quote from Bob McTeer, former head of the Dallas Fed, The first rule of forecasting should be dont do it. Nothing good comes from it.The second rule, is, if you give a number, dont give a date; or, if you give a date, dont give a number. My rule, the local economies, as measured by their GDP, has less to do with the performance of the domestic markets than meets the eye. The reasons for that are two-fold:

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Europe: The 27 countries of the European Union represent the largest economic block in the world. Within the EU is the Euro Zone, a group of 17 countries that make up the monetary union with a common currency, the Euro. It is primarily within the EZ that the impact of the sovereign and bank debt crisis on the worlds economies is being played out. The Euro Zone is in a tough spot. Unemployment across the Zone tops 11%, 25% in Spain. Total public and private debt approaches 450% of GDP (the U.K., though not in the EZ, has debt of over 500% of GDP) most of which is held by banks and nonfinancial companies. Like the U.S., the EZ is torn between increasing austerity to reduce debt and stimulus to grow the economy and reduce unemployment. Given the political complexities of the EZ, it appears that the region will struggle to achieve any growth at all in 2013. The United States: The worlds second largest economy is the United States. As happened in 2012, in fundamental ways, the financial problems in the U.S. are very much the same as in Europe: high national debt, high unemployment, and political impediments to taking decisive action. In addition, the inevitable slow down/recession in Europe will take a toll on American businesses on account of the impact on exports as well as profits generated from overseas operations. On the other hand, the U.S. has advantages that Europe does not have: a single national government that, at least theoretically, can make sweeping fiscal and regulatory changes when the pressure gets high enough and a central bank that has the proven ability to

First, GDP is a measure of national expenditures which is

essentially a proxy for business revenues. While changing revenue does have an impact on profits, the main driver of stock prices over the long term is earnings per share which is driven by many factors, including expense reduction and share buybacks.

Second, companies operate in a global economy. What

happens in one major economy can affect the performance of companies around the world. The second thing to keep in mind is that stock price performance is determined by many factors other than corporate performance, including the current P/E ratio relative to

third rule, is, if you historical norms, investor sentiment and M&A activity. have to do it, do it Therefore, we will spend only a little time on economic foreoften. casts. In terms of the global outlook, the typical forecast is Ill keep that in for real (inflation-adjusted) GDP growth of about 3% with mind. steady improvement throughout the year. Here are comments on the larger economies:

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2013 Forecast and Stock Market Commentary
take decisive and effective action to prevent, or at least mitigate, a recession or deflation. American businesses have the further advantage of having the strongest balance sheets theyve had in years. Against that backdrop, here are my economic forecasts for 2013 (plus a few from the Street):

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year-end. For 2013, with the Feds promise to keep short term rates low until unemployment substantially improves, I expect the 10-year rate to be in close proximity to 2% by the end of the year. I was right that there would be no tax reform in 2012 and that there would be promise of reform in 2013. The key word is promise, in that I believe political interests will prevent major reform from happening any time soon. For comprehensive reform to occur, it will have to be phased in over a long period of time. Well see what emerges.

Unemployment ended the year a bit below my 2012 forecast and is now around 7.7%. I expect that to fall further by the end of 2013 to about 7.2% (this modest reduction reflecting my concern about drag from the eventual fiscal cliff agreement) Monthly non-farm payroll increases are hovering around my last years estimate of 150,000 and I dont expect a significant change in 2013, certainly not above 175,000 by the end of the year. My CPI estimate for 2012 was high at 2.5% as it is settling in closer to 2% and thats going to be my estimate for 2013. My estimate of U.S. real GDP growth (above inflation) of 1.5%, for 2012 was a little light with the real rate topping 2%. On account of the fiscal cliff negotiations, Im anticipating lower real growth in 2013, say, back to my 1.5%. My estimate of corporate profits falling below 8% for 2012 was in the ballpark in that the Bureau of Economic Analysis showed the most recent annual increase at about 7.5%. For 2013, I think corporate profits may slightly improve to, lets say, 7.8% overall and 9% for the S&P 500. The Case-Shiller home price index did stabilize in 2012, as expected, and may show the first annual gain since 2006. My expectation for 2013 is another small improvement in the neighborhood of, say, 5%. My estimate of the 10-year Treasury bond rate remaining below 2.25% was achieved in March, but subsequently dropped back to about 1.75% at

My expectation of dollar strengthening turned out to be wrong as the Fed managed to keep the dollar about even with developed economies in Europe while falling against Asian currencies.

The preceding forecast assumes no major disruption due to war or fiscal calamity. China: Chinas growth rate will fall just below 8% in 2012 according to Morgan Stanley who also predict a slight improvement above 8% in 2013. Goldman Sachs estimates an 8% growth rate. Who am I to argue when these two agree? Japan: Japan has the highest gross debt (public and private) as a percent of GDP. Both Goldman Sachs and Morgan Stanley are predicting sub 0.5% growth for Japan. Again, no argument from me. Emerging Markets: By their nature, emerging markets (speaking principally of Asia and Latin America) lead global growth. In 2012, EM will have real GDP growth of about 5% according to Morgan Stanley and somewhat higher growth in 2013. I concur with that estimate.

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2013 Forecast and Stock Market Commentary
The Investment Forecast for 2012 The Equity Markets Before making predictions, lets start with a few observations: Page 11 shows the total return of the S&P 500 index over the last 30+ years and the last 10.

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The longer term chart shows that over extended periods of time, if you ignore the disruptions caused by the tech bubble and the current recession, the index growth from peak-to-peak and trough-to-trough averages roughly 9.5%. This chart also shows that the index generally stays within a range of +/- 12% around its 50-week moving average. The shorter term chart shows this pattern in a more magnified manner for the last 10 years. The 9.5% pattern continues, though this trend is shorter and, therefore, less reliable. The long term momentum indicators at the bottom of the charts (MACD and Full STO) are in neutral territory, showing neither upward nor downward momentum. However, the 50-week moving average envelope is showing positive momentum. 2010. Thus, given the historical long term trend growth of the S&P 500 index of about 9.5% (which, by the way, does not include the gains from reinvested dividends averaging about 2%) and the corresponding growth of corporate earnings, I think it would be reasonable to conclude that that pattern is likely to continue. Now the question is what will happen in 2013. We all know about the excessive levels of public and private debt as well as the high unemployment levels in the U.S. and, especially, Europe. The assumption on the part of some is that that debt will need to be reduced in the coming years through fiscal drag, that is, a combination of tax and spending policies that reduces the annual deficits to a more sustainable level. This drag, along with the prospect for increasing interest rates in the future lead some of my favorite sources of investment analysis to conclude that

Another observation has to do with corporate profits. Note the chart on page 1 showing the steady improvement in corporate after tax profits. This next chart shows the annual percentage change in those profits (blue) overlaid with the annual percentage change in the S&P 500 (red). Note the close correlation. Looking back over the last 10 years, I calculate that corporate profits have increased by an average of over 10% per year. Since the recession began in 2008, I calculate the average to be between 13% and 15% (depending on my data source), though this was heavily influenced by a very strong year in

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2013 Forecast and Stock Market Commentary
corporate profits will be inevitably impacted and that equity returns, therefore, will be curtailed from historical levels. In prior years, I have fully bought into this argument leading to my more subdued expectation of equity returns (also known to some as the new normal). Now, Im not so sure. Heres why:

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For the last 30+ years, equity performance has had three major resets in 1987, triggered by program trading, in 2001 for the tech bubble and in 2009 for the housing/credit bubble. After each of those interruptions, the market got back onto its historical growth trend, albeit from a reset starting point. Unless we believe that another reset is imminent and I dont the long term trend should remain more or less on track. The second reason Im somewhat sanguine about equity growth continuity is that the major central banks and the national governments have demonstrated a commitment to implement policies to mitigate a financial crisis. Yes, printing money has been a big part of the solution, but if everyone does it, the main harm that is done (at least, so far) has been to debt holders who are repaid with deflated currency and this is stretched out over a long period of time rather than occurring suddenly. Similarly, I believe the drag resulting from fiscal or monetary restraint will also be stretched out over many years. Its just possible that global growth is about to benefit from a set of factors that have been brewing over the last couple of years. In the U.S., we have the real possibility of an energy boom and energy independence; the growth of China, India and other emerging nations will bring enormous numbers of people into the worlds economy, creating both demand as well as productive resources. The U.S. output gap will constrain inflationary pressures. Here, from Wells Capital Management, is a chart of the U.S. gap. Considering that a large source of the gap comes from the unemployment level, and considering that the Euro Zone's unemployment is even larger than that in the U.S., I think it is reasonable to assume that a global gap will stand in the way of inflationary pressures. According to Wells, since WWII, only once did a recovery end before the gap was closed. My research suggests that the gap wont be closed for at least the next three years

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2013 Forecast and Stock Market Commentary

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Corporate earnings have recovered and PE ratios are reasonable.

So, my bottom line is this (drum roll, please): Absent a war or similar shock, I expect the S&P 500 (adjusted to include reinvested dividends) to increase by 9% in 2012. But heres a wrinkle. The market never goes up (or down) in a straight line. For the past 20 years, and probably longer, the market has almost always had a correction during the year, often exceeding 8%, following a period of growth. Whether this is psychological, profit-taking or due to economic news, who knows? But, if history is any guide, we can expect such a correction again in 2013. Since...

the S&P 500 (SPY) had such a strong year in 2012 (up about 16%), forward looking revenue and earnings reports are weakening, much uncertainty remains on account of the continuing Washington negotiations for spending reductions, and the technical chart for SPY is signaling caution,

...my expectation is that the correction (or, at least, weakness) in 2013 will

That said, the less commonly referred to Shiller PE ratio, which normalizes the PE ratio by using an inflation-adjusted 10-year average, is on the high side a negative omen.

come in the first half of the year with recovery and strength in the second half. So, having made my prediction for the S&P 500 (SPY), what about international equities? The chart on page 12 shows the relative total return performance of the S&P 500 (SPY) compared to Europe and Asia. While the pattern in 2011 showing relative strength for the U.S. led me to conclude that the S&P was in the driver seat for 2012 (as it was for 6-9 months), the current outlook clearly favors the international sector over the U.S. Given the length of the cycle that favored the U.S. and the protracted dysfunction in Washington, Im inclined to think that the relative strength of international markets, especially in Asia will persist throughout 2013.

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2013 Forecast and Stock Market Commentary

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turn estimate for 2013 for LQD is 7% but I admit this will take careful Income-based Markets There is near consensus that bonds are in a bubble. Have a look at the chart on the top of page 13. It shows the Dow Jones Corporate Bond index over the last 15 years had a compound annual growth rate of about 7.3% per year. During that same period of time, the 10-year Treasury bond rate fell 70% and the S&P 500 (SPY) advanced only 4.7% per year. Among almost all the analysts I read, the feeling is that interest rates cant go much lower and, indeed, that we are drawing close to the time of eventual rate increases. While the Federal Reserve has now tied short term interest rates to the unemployment rate with anticipated rate increases not coming for another 3 years or so, that doesnt keep the markets from driving up interest rates if it is felt that inflation may be entering the market, risk premiums need to be widened, or that bonds are just due for a correction as may occur in any bubble. And, as you know, rising interest rates drive down the value of bonds. While I cant say Im not also concerned given the consensus of market analysts, I am not yet ready to give up on bonds and other interest-oriented securities. Heres why, along with my 2013 expected return scenarios:

watching. Emerging market bonds represent another source of fixed income but carry some additional risk related to geography and currency. That said, while emerging market bonds (using the iShares JPMorgan US Dollar Denominated Emerging Market Bond Fund EMB) carry about the same yield today as investment grade corporate bonds (LQD), they outperformed LQD by almost 6.5% in 2012 for a total return of about 18%! With the trend relatively steady throughout 2012, from a technical standpoint, there is fair support for continuation into 2013. Given my lowered expectation for LQD, I will also introduce some conservatism for EMB, forecasting 2013 total return of 12%. Preferred stocks were a favorite of mine for 2012 and they begin 2013 as a favorite again. Using the iShares S&P Preferred Stock Index (PFF) as the benchmark, the yield at year-end 2012 was about 6% and the total return for 2012 was over 16% (who said you cant make money in preferred stocks?). Since a little over half of the 2012 gain came from demand factors in the first two months of 2012 and that the annualized trend in the last half of the year is more like 10%, my expectation for preferred stocks in 2013 is lowered to 8%.

For the U.S. investment grade corporate bond market, which might be seen as the most vulnerable after Treasury bonds, the diversification of bonds in the index fund that I follow (LQD) results in maturing bonds being reinvested in the more current rates. Therefore, as/when interest rates rise and the bonds roll over, it is not clear to me exactly what will happen to the overall index and Im willing to wait and see how the index actually changes. In 2012, LQD rose over 10% of which about 4% was from interest and the rest from factors that drove up the value of the bonds (e.g., investor demand and declining interest rates). My total re-

Municipal bonds is the last category for the income-based securities I will review in this forecast. In 2012, the Nuveen Closed-end Municipal Bond Fund Index gained 16%. (See the chart at the bottom of page 13.) Note that this is a leveraged fund index in which the fund managers borrow at low interest rates and use the proceeds to purchase additional bonds. Like other leveraged closed-end funds, this strategy has been very successful in recent years for obvious reasons. The question is whether market sentiment and prevailing borrowing rates will

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2013 Forecast and Stock Market Commentary
support similar returns in the future. It should also be noted that, while not as prevalent in the index, many of the leveraged and unleveraged municipal bond funds from various fund managers experienced a sharp selloff in the last quarter of the year on account of profit-taking (many of the leveraged funds were up more than 20% at that point) and concern about diminishment of the tax advantaged interest coming from fiscal cliff negotiations and tax reform (p.s. the tax agreement on January 1st did not alter municipal bond interest deductions and the funds are showing a sharp improvement on January 2nd). Even after the selloff, however, many of the leveraged funds ended the year with a total return in the neighborhood of 15% including roughly 6% of federally tax free income. In contrast, the unleveraged fund represented by the iShares S&P National Municipal Bond Fund (MUB) finished the year with a total return of about 5%, about 2.9% coming from federally tax free interest. My sense for next year is that the leveraged muni bond funds will stabilize in the absence of interest rate movements and significant tax law changes, and will have a total return of 15% while the unleveraged funds, subject to less interest rate risk, will provide 6% total return in 2013 still very acceptable compared to taxable bonds, not to mention,Treasury bonds. Putting it all together, even if the equity markets perform as advertised, it appears at this stage that a balanced portfolio with an income-oriented component can add value along with reduced volatility. Real Estate, Oil and Gold The Dow Jones Real Estate Investment Trust Index rose almost 13% in 2012, most of which occurred in the first four months of the year. As home prices stabilize and improve in value, this index is likely to share in the benefits. My forecast for real estate is for a 10% gain in 2013. Oil had a difficult year in 2012, losing over 12%. The factors that influence

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the commodity are quite varied and include geopolitical risks, currency valuations, sentiment toward economic growth, and supply dynamics. I think the message for 2012 was one of overriding concern about a global slowdown. Believing these concerns have about run their course, I expect a modest increase in the price of oil for 2013, say, under 5%. As I said last year, while Im aware of studies that indicate gold can enhance returns without added portfolio risk, I see investments in the shiny metal more of a trading play than a long term investment and would limit exposure to a small portion of a portfolio, if that much. I place no estimate on the price improvement for gold in 2013. ** *** ** As the developed economies of the world address the difficult issues of debt deleveraging and unemployment, as well as political dysfunction, investors need to keep a watchful eye on the performance of market segments both absolutely and relatively, in order to avoid unwelcome surprises. Keep in mind my previous comment about the S&P 500 experiencing adjustments of 8% or so in almost every year over the last 30+ and use that information as an incentive to remain balanced in the asset allocation. If volatility would be hard to live with, there appear to be viable income-oriented investments with reasonable expected returns to balance the portfolio though, of course, nothing can be guaranteed.

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2013 Forecast and Stock Market Commentary

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2013 Forecast and Stock Market Commentary

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L a n e A s s e t M a n a ge m e n t
S&P 500
The S&P 500 (SPY) remained essentially flat in December as the fiscal cliff negotiations went through its motions. Now that the immediate crisis has been averted, we can look forward to the next round of talks in a couple of months when the debt ceiling is confronted and spending cuts become front and center. Technically speaking, its hard to tell whether the current slowdown in momentum is due entirely to the just-ended negotiations or whether a longer view was in mind that sees the potential for continuing dysfunction in Washington. My suspicion is the latter, but well have to see what January brings. Accordingly, I advise caution in terms of any substantial new commitment to owning U.S. equities. Its not that Im not optimistic about

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the prospect for favorable returns in 2013 as discussed in my forecast, its that I would like to see some positive momentum in addition to some escape velocity from the current support/resistance level at $142 before increasing my commitment to the S&P at this time.

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 no guarantee of future results.

L a n e A s s e t M a n a ge m e n t
All-world (ex. U.S.)
In contrast with domestic equities, I have become much more bullish for international equities. As shown below, the broad all-world index has clearly broken free of its resistance line at $42 while the spread on the moving averages is increasingly positive. If there is a cautionary note in the chart, it can be found in the emerging weakness in the bottom two momentum indicators. For now, however, I am going to read that as the potential for letting off a little steam given the strength of the index over the last 5 or 6 weeks. It may be worth holding some cash aside to take advantage of a correction if it comes. For investment purposes, theres nothing wrong with the broad index. However, if you drill down to individ-

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ual regions you will find some real disparity with Asia (excluding Japan) showing the most strength and Latin America the least. Europe as a whole is matching Asia at the moment, but I dont see a compelling reason to go there in light the economic headwinds.

VEU is an exchange-traded fund designed to match the performance of the FTSE All-world (ex. U.S.) Index. Its prospectus can be found online. Past performance is no guarantee of future results.

L a n e A s s e t M a n a ge m e n t
U.S. And Emerging Market Bonds
LQD represents the total return (capital gains plus interest income) for investment grade corporate bonds. EMB represents the JPMorgan US Dollar Emerging Market Bond Fund, about 85% of which is government bonds. Following the massive net influx into bond funds during 2012, LQD has now stalled over the last two months reflecting a rotation back into equities, possibly on concerns of rising interest rates. As I dis-

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cussed in my forecast, Im not yet convinced its time to move out of U.S.-based investment grade corporate bonds as these concerns have surfaced in the past. That said, there are alternatives to corporate bonds that should be considered for diversification and performance. One, shown below, is emerging market bonds represented by the exchange-traded fund EMB. The chart on the right shows the outperformance of EMB relative to LQD. Clearly, there is risk involved as can be seen from the volatility of the relative performance chart, but the trend is positive and the momentum is supportive.

LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond Index. EMB is an ETF designed to match the iShares JPMorgan USD Emerging Market Bond Fund. Prospectuses can be found online. Past performance is no guarantee of future results.

L a n e A s s e t M a n a ge m e n t
Asset Allocation and Relative Performance
Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. Commonly, investors

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choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually or when the actual percentage allocation deviates from the longer-term strategic plan. One useful tool Ive found for establishing and revising asset allocation comes from observing the relative performance of major asset sectors (and within sectors, as well). The charts below show the relative performance of the S&P 500 (SPY) to an investment grade corporate bond index (LQD) on the left, and SPY to a Vanguard Allworld (ex U.S.) index (VEU) on the right. On the left, we can see a pattern for the last 6 months of reversing momentum between SPY and LQD with modest current support for equities over U.S. corporate bonds. On the right, we see a 5-month pattern of international equities outperforming those of the U.S. , reversing the pattern of the prior 12 months. This is a much stronger pattern with all momentum indicators supporting an increase in allocation to international equities.

SPY, LQD, and VEU are exchange-traded funds designed to match the experience of the S&P 500 total return index, the iBoxx Investment Grade Corporate Bond Index, and the FTSE Allworld (ex US) index, respectively. Their prospectuses can be found online. Past performance is no guarantee of future results.

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L ane A s s e t M anage m e nt
Disclosures Edward Lane is a CERTIFIED FINANCIAL PLANNER. Lane Asset Management is a Registered Investment Advisor with the States of NY, CT and NJ. Advisory services are only offered to clients or prospective clients where Lane Asset Management and its representatives are properly licensed or exempted. No advice may be rendered by Lane Asset Management unless a client service agreement is in place. Investing involves risk including loss of principal. Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity. Small-cap stocks may be subject to higher degree of risk than more established companies securities. The illiquidity of the small-cap market may adversely affect the value of these investments. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds and exchange-traded funds carefully for a full background on the possibility that a more suitable securities transaction may exist. The prospectus contains this and other information. A prospectus for all funds is available from Lane Asset Management or your financial advisor and should be read carefully before investing. Note that indexes cannot be invested in directly and their performance may or may not correspond to securities intended to represent these sectors. Investors should carefully review their financial situation, making sure their cash flow needs for the next 3-5 years are secure with a margin for error. Beyond that, the degree of risk taken in a portfolio should be commensurate with ones overall risk tolerance and financial objectives. The charts and comments are only the authors view of market activity and arent recommendations to buy or sell any security. Market sectors

and related exchanged-traded and closed-end funds are selected based on his opinion as to their usefulness in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations arent predictive of any future market action rather they only demonstrate the authors opinion as to a range of possibilities going forward. All material presented herein is believed to be reliable but its accuracy cannot be guaranteed. The information contained herein (including historical prices or values) has been obtained from sources that Lane Asset Management (LAM) considers to be reliable; however, LAM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change without notice and readers are urged to check with tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Periodically, I will prepare a Commentary focusing on a specific investment issue. Please let me know if there is one of interest to you. As always, I appreciate your feedback and look forward to addressing any questions you may have. You can find me at: www.LaneAssetManagement.com Edward.Lane@LaneAssetManagement.com Edward Lane, CFP Lane Asset Management Stone Ridge, NY Reprints and quotations are encouraged with attribution.