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LFM Commentary November 2009

LFM Commentary November 2009

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Published by eclane
Economic and Stock Market Commentary
Economic and Stock Market Commentary

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Published by: eclane on Feb 28, 2010
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02/28/2010

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normal‖ of lowered re-
turns, especially oncethe current and tempo-rary impact of thestimulus payments wearoff.
Meanwhile, Bill Miller of Legg Mason CapitalManagement points outthat back to 1871, therehas never been a 10-year period of negativestock performance that
wasn‘t followed by bet-
ter than average per-formance for the nextten years.The question is, which isreality? Is there any doubtwhy the market is confused?...to say the least. DuringOctober, there were 22trading days. On all butfive of them, the high-lowdifferential on the Dow Jones Industrials index ex-ceeded 100 points, or about1%. On nine days, thespread was over 150 points.
That‘s huge. Despite a high
-low spread for the month of about 6%, the index endedthe month just about whereit started.Last month, I offered mythoughts on what had beendriving the market since
March. But what‘s driving
the market now? I submit itis some combination of an-ticipation of a technical cor-rection/profit taking, reac-tion to daily news items,and reality setting in.On the technical side, themarket has come so far, sofast, that there is wide-spread consensus that acorrection is due.On the daily news side, in
 just recent days, we‘ve seen
evidence of a reboundingeconomy with the GDPscoring a 3.5% annualizedgain last quarter (the firstpositive showing in a year)and the next day weeklyunemployment claimsshowed virtually no im-provement, personal dispos-able income slipped andpersonal spending declined.And the beat goes on.The last point
 — 
realitysetting in
 — 
is the criticalone, in my opinion. Just thispast week, two noted in-vestment gurus offered dif-fering points of view:
Bill Gross of PIMCOdiscussed his view of the fundamental changesthat have occurred in
the world‘s economythat will result in a ―new
Confusing...
Stock Market Commentary by Ed Lane
November 2009
Lane Financial Management
Special points of interest:
A confused market
Green shoots continue,but is this reality?
While momentum indi-cators are still positive,technical analysis sendsout warning signals
Investing opportunitiesare limited. Caution isadvised.
Inside this issue:
Confusing...to say theleast
1
At-a-Glance
2
Economic Recap
3
Market Recap
4-5
Technical Analysis
6-8
Fund Highlight
9-11
My Bottom Line
12
Disclosures
13
 
 
Page 2
Lane Financial Management
Here is a one page summary of my marketcommentary:
The Economy
 
The Great Recession may have techni-cally ended with a 3.5% gain the GDPachieved in the third quarter of this year(although it is reported that almost all of the gain came from stimulus and othergovernment spending, and a slowed paceof inventory reduction
 — 
hardly the stuff of sustainable growth);
The Conference Board's Index of LeadingEconomic Indicators suggested pendingeconomic recovery with a 1.0% Septem-ber increase that was the sixth consecu-tive monthly rise;
A weak dollar, especially with regard toemerging market economies, has bene-fited the U.S. economy;
Meanwhile, earlier gains in consumerconfidence have flagged with the contin-ued run-up in unemployment, flatteningof personal disposable income and de-clines in personal spending;
As less than half the current stimulusprogram dollars have been spent so far, Iexpect the economy will enjoy artificialsupport well into next year with a realquestion mark thereafter.
The Market
 
The US stock market experienced aroller-coaster ride in October, endingthe month just about where it began;
Emerging market debt and equity, true toform of being more volatile than marketsof developed economies, suffered evenmore during October, especially in thelast week;
Gold and oil/energy were among thevery few areas that did well in October;
Momentum indicators would suggestthat the market still has legs, while over-bought indicators strongly suggest apullback is in the cards. It may have ac-tually started in October and perform-ance in November will be most interest-ing to watch.
The Current Opportunities
 
The best longer-term equity opportuni-ties appear to be in emerging econo-mies, technology, small cap stocks andglobal basic materials;
Gold and emerging market debt con-tinue to be appropriate hedges againstdollar weakness;
Domestic debt securities offer reason-able returns with low volatility;
The sharp advance since March hasmade many, if not most, markets vulner-able to a pullback. Caution and patienceis advised.
Fund Highlight
 
This month‘s focus is on the issue of 
dollar weakness and several funds arehighlighted as potential hedge;
My Bottom Line
 I am concerned about the U.S. economyand, at least for the moment, cautiously op-timistic about the market.
At-a-Glance
If all economists werelaid end to end, theywould not reach a con-clusion.
 — 
George BernardShaw
 
 
Page 3
Lane Financial Management
There was good news:
The Conference Board's Index of LeadingEconomic Indicators suggested pendingeconomic recovery with a 1.0% Septem-ber increase that was the sixth consecu-tive monthly rise. The 5.7% increase dur-ing those six months was the strongestsince early-1983 and the index itself wasat the highest level since October 2007;
The GDP advanced 3.5% in the thirdquarter;
U.S. durable goods orders recoveredfollowing declines in the prior twomonths.
...
and some not so good:
While the advance in the GDP was en-couraging on the surface, virtually all of the gain came from non-sustainablesources: stimulus and other governmentspending and deceleration of the declinein inventories;
Earlier gains in consumer confidencehave flagged with the continued run-up inunemployment. The Conference Boardindicated that consumer confidence dur-ing October fell 10.7% from September
(still nearly double last winter‘s low);
 
While continuing dollar weakness addsto the economic recovery, the longerthis trend continues, the more dangerousit becomes as an impetus to rising inter-est rates and inflation.I could go on with the good news and that
which is less so, but I‘d rather talk briefly
about my longer term concerns. As aKeynesian, I see the GDP made up of fourparts:
Consumer spending, which has previ-ously contributed about 65-70% toGDP, seems unlikely to rebound aswage growth is stymied and credit istight (among other reasons);
Government spending, which has ac-counted for about 18-20% of GDP, islikely to continue with stimulus spendingcontinuing relatively high into 2011though starting to decline mid-2010(absent any new stimulus programs);
Investment spending, about 8-10% of GDP, will likely be weak except fortechnology and other cost-cutting ex-penditures; and
Net exports, the balance, at about 5%.Based on my research, I currently acceptthe point of view that the domestic sourcesof GDP growth may be constrained to un-der 2%. If this turns out to be true, the im-plications for employment are bleak. And, if that turns out to be true, the political pres-sure for more stimulus spending, especiallyin an election year, will be hard to resist
 — 
 further exacerbating federal budget deficits.Other than additional government spending,GDP gains will need to come from net ex-
ports. As the U.S. is still the world‘s largest
manufacturer, a declining dollar will facilitateexports, not to mention boost reportable
profits by U.S. companies‘ overseas opera-
tions. But there is the rub: how long and atwhat pace can the dollar continue to slide,and how will it end?
Economic Recap
To those critics whoare so pessimisticabout our economy,I say, "Don't be eco-nomic girlie men!"
 — 
Arnold Schwar-zenegger

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