January 2010

L a n e F i n a n c i a l M a n ag e m e n t
Stock Market Commentary .. by Ed Lane

Happy New Year

Wow! Not many of us have witnessed a
year like 2009 before — not so much be-
cause of market performance (see below for
the S&P 500 (black, left axis) and NASDAQ
Special points of interest: (red, right axis) indexes in 1997, 1999, and
2003 for other examples of rapid price ap-
 Positive market mo-
preciation), but for the economic conditions
mentum continued in
and global government response to it.
December
Now that the year is over, I can say I learned
 The economy shows
two important lessons: One, in the face of
signs of slow but steady
impending economic disaster, do not under-
improvement
estimate the willingness of global govern-
 Interest rates may be ments to do whatever it takes to try to
increasing in anticipa- lessen the pain and restore growth.
tion of Fed exit strate-
The other lesson, even more valuable from
gies; the market may
an investor’s standpoint, is that the momen-
not be ready
tum of a market is a more reliable predictor
 2010 Fearless Forecast
of market performance than the opinions of
starts on page 3
market strategists.
As we enter the final year of the decade
with virtually
no net growth
in either index
in over 10
years, we can
take these
lessons to inform our investment strategy
for the coming year (and beyond).
For my part, as you will see in my 2010
forecast on the following pages, I will try
not to let my current opinions about the
challenges facing the economy overly in-
fluence my thinking about investment op-
portunities, but rather give greater cre-
dence to what the market itself is telling
us through technical analysis. While fun-
damental and technical analysis both rely
on extrapolation of historical behavior,
technical analysis boils that behavior
down in a way that fundamental analysis
cannot do.

Inside this issue:

Happy New Year 1

At-a-Glance 2
2010 Fearless Forecast 3-5

Economic Recap 6

Market Recap 7-8

Momentum Watch 9-11

My Bottom Line 12

Disclosures 13
Page 2
L an e F in anc i a l M ana ge me nt
At-a-Glance
Here is a quick summary of this month’s  Asia/Pacific (ex. Japan) gave back some
market commentary: of its earlier gains but still had a strong
year
The Economy
 High yield bonds ended the year
Economic signals were generally positive for
strongly as credit spreads tightened.
the month:
The chart below shows 2009 returns for
 Initial claims for unemployment insurance
selected market sectors (detail on page 7).
continued to decline. The unemploy-
ment rate is inching downward as non- The Current Opportunities
The future ain’t what it farm payrolls declined only slightly in No-
Longer term, the best opportunities are
used to be. vember
Asia/Pacific (ex. Japan), Emerging Markets,
— Yogi Berra  The Index of Leading indicators contin- basic materials and technology.
ued its uptrend while Consumer Senti-
2010 Forecast
ment has retraced its decline back to
year-ago levels. The market will continue to do well, though
at a reduced pace, as long as government
Ironically, as the economy improves, recent
stimulus continues to flow.
Fed discussions about strategies to exit
stimulus programs sent negative shocks to My Bottom Line

the markets. I continue to be concerned about the pros-

The Market
For the most part, momentum remained
positive in December:
 Both the S&P 500 and Emerging Markets
performed strongly in December
pects for the U.S. economy over the next
several years absent sustainable new em-
ployment opportunities. The securities
market, on the other hand, will continue to
provide opportunities for gain.
Page 3
L an e F in anc i a l M ana ge me nt
2010 Fearless Forecast — On the One Hand, On the Other
Before I offer my forecast for stock market
performance and the economy in 2010,
here’s what others are saying:
 In a recent Bloomberg survey of leading
strategists from ten of the largest bro-
kerages, the S&P 500 will advance an av-
erage of 9.8% for 2010. A Barron’s sur-
vey of twelve strategists predicted 12%.
 Mohamed El-Erian of PIMCO has pre-
dicted a10% decline for the year (notable
since this is something few asset manager
There's no trick to be- market strategists ever do).
ing a humorist when
 Economists Nouriel Roubini of NYU, Joe
you have the whole
Stiglitz of Columbia and Paul Krugman of
government working
Princeton (the latter two being Nobel
for you.
laureates) have all indicated a ―significant‖
— Will Rogers chance of economic decline in 2010,
most likely to occur in the second half of
the year, absent additional government
stimulus.
Many forecasters indicate that the S&P will
cool in the second half of the year as stimulus
funds are expended (again, absent additional
stimulus).
As an actuary, I should know not to make
predictions as the one thing we know for
sure about forecasts and assumptions of the
future is that they will be wrong. That said,
I’m inclined to go along with the majority
opinion of the market strategists, namely,
that the U.S. market will be positive for the
year with the best part of the performance
occurring in the first half of the year.
My 2010 forecast reflects the ying and yang
of the U.S. market in 2010 as I see it.
 On the one hand, stimulus payments and
foreign-earned profits will push the S&P
500 higher, perhaps even higher than
conventional wisdom, to a range of
1200-1300.
 On the other hand, the brakes will
come on when deficit reduction plans
and activities become more clear and
imminent.
 The saving grace for the market in 2009
was massive global intervention. Since
over half of already approved U.S.
stimulus remains to be distributed in the
first half of 2010 and more may come,
the stimulus will have its desired effect
on consumption and will boost market
performance.
 Sooner or later, as recovery appears to
be more imminent (or deficits too large
to ignore), the Fed will begin to with-
draw liquidity from the system or, at
least, signal that that moment is nigh.
Ironically, when this happens, it’s likely
to place a strain on the market as inter-
est rates increase and credit conditions
tighten. That said, I don’t expect this
will occur much sooner than late 2010.
 Domestically, technology, large cap,
consumer discretionary, basic materials
and medical devices are likely to be
among the best performers.
 From a regional standpoint, Emerging
Markets and Asia/Pacific (excluding Ja-
pan, ―AxJ‖), though more volatile, are
likely to outperform the S&P 500 and
other developed markets for the fore-
seeable future.
Page 4
L an e F in anc i a l M ana ge me nt
2010 Fearless Forecast (cont.)
 I’m ambivalent about the dollar. Weak- will be watching carefully:
ness is in U.S. interests in that it stimu-
Employment is the ―sine qua non‖ to con-
lates exports and fattens foreign-earned
sumer spending and there are several meas-
profits. On the other hand, as the Fed
ures to keep in mind, including new unem-
unwinds stimulus and deficit hawks gain
ployment insurance claims, the unemploy-
the upper hand, rising interest rates will
ment rate, and hours worked. As the graph
strengthen the dollar. Bottom line, I see
below shows, the employment picture is
the dollar strengthening by the end of
indeed improving, but still has a long way to
the year.
go. I expect new unemployment insurance
Any man who afflicts  I have become less enthusiastic about claims to continue to decrease and the num-
the human race with gold. With ―push me, pull you‖ influ- ber of new jobs created to steadily increase,
ideas must be prepared ences and interest rate risk to the upside, though not enough to bring the unemploy-
to see them misunder- gold’s expected performance is too un- ment rate below 9% by year-end.
stood. predictable to continue my previous bull-
 H.L. Mencken ish stance.

 Quality and high yield income securities

of short and intermediate duration
(conventional and convertible bonds and
preferred stocks) will provide reasonable
returns with limited volatility. That said,
the prospect of increasing interest rates,
could put these funds (especially invest-
ment grade) under price pressure.
Despite stimulus, difficulties will remain in
the domestic economy. Ultimately, the
economy can’t fully recover until final de-
mand is restored (consumer spending ac-
counts for about 65% of GDP). Stimulus
spending will support demand for a period of
time, but no one believes that can continue
indefinitely. The hope, I suspect, is that the
stimulus will provide a catalyst for a more
self-sustaining economy. We’ll see.
Consumer spending derives not only from
improvement in disposable income, but also
from access to, and use of, credit. There-
fore, interest rates and credit conditions will
be important factors to watch. While posi-
tive in some respects, the charts on the
next page are troubling to the markets in
that interest rates are increasing and con-
sumer credit is continuing to unwind. I be-
lieve the 10-year Treasury bond rate will
continue to climb, perhaps to 4.5%, while
consumer credit continues to contract, both

While I will lean heavily on technical momen- unfavorable to the economy and the market

tum indicators to help identify investment in the short run, at least.

opportunities, here are some of the eco- Finally, I will be listening to the ―buzz‖ —
nomic indicators affecting final demand that I interviews with (admittedly selected) econo-
Page 5
L an e F in anc i a l M ana ge me nt
2010 Fearless Forecast (cont.)
When the facts change,
I change my mind.
What do you do, sir?
— John Maynard
mists and money managers who go beyond a
Keynes
superficial discussion of ―green shoots.‖
Without going into detail, I would say the
economic outlook from these sources today
is cautious if not decidedly negative.
I close out 2009 and ring in 2010 with a little
investment wisdom (edited for space), cour-
tesy http://www.investmentpostcards.com/:
The Reformed Broker: If it’s true that we
learn new things with every passing year then the
year 2009 was like a crash course in fringe eco-
nomics, lunatic civics and paranormal market ac-
tivity all rolled up in one.
TPC (The Pragmatic Capitalist): Wall Street-
ers are like gold fish - they have very short
memories, are practically useless and require a
great deal of help from outside resources to sur-
vive.
Lawrence McDonald (Author, A Colossal
Failure of Common Sense): $10 trillion will al-
ways buy you 4000 DOW points.
Noah Rosenblatt (UrbanDigs): the fed can
really buy their way out of a depression.
Eric Jackson (Ironfire Capital): it’s always
darkest before the Fed jumps in with backstops
for any large institution that moves.
Francine McKenna (Re: The Auditors):
there is no need for me to be afraid but every
reason to be wary.
Trader Mark (Fund My Mutual Fund): Ben
Bernanke can remain irrational far longer than I
can remain solvent.
Karen Glassman (Tirschwell & Loewy):
Gordon Gekko has the same initials as Greed is
Good, Government and Goldman … how ironic.
Stuart Varney (Fox Business Network): it
is possible to borrow a trillion dollars, print a
trillion dollars and nationalize a big chunk of the
American economy, and still see the biggest nine
month stock market rally in three generations!
OneTwo (1-2 Knockout): no one ever went
broke underestimating the stupidity of govern-
ment.
Patty Edwards (CNBC Fast Money): money
covers a multitude of sins, usually those of politi-
cians and bureaucrats.
Tadas Viskanta (Abnormal Returns): Too
big to fail = Too big to exist…also, it’s Gold-
man’s world, we are just living in it.
Michael Panzner (Financial Armageddon):
only three words matter when it comes to in-
vesting in today’s markets: ignorance is bliss.
The Analyst (The Atlantic): despite 10% (or
18%) unemployment, it totally makes sense that
retail and consumer discretionary stocks are
back up to 2007 levels.
Wade Slome (Sidoxia Capital): $14 trillion
in debt, 10% unemployment, and approval of
socialized healthcare can lead to an +80% move
in the NASDAQ Composite over a 10 month
period.
 Page 6
L an e F in anc i a l M ana ge me nt
Economic Recap
We ended November with the shock of Du- real consumer spending.
bai requesting extension on their massive
 The Conference Board's Index of Lead-
debt repayment. The result was a one day
ing Economic Indicators continued its
loss of nearly 2% in the S&P 500 and a nearly
uptrend in November giving a strong
4% drop in the Morgan Stanley Emerging
signal that the recent recession has
Market index. In both cases, the indexes
ended. The 0.9% rise was the eighth
bounced back the very next day suggesting,
consecutive monthly increase. More-
perhaps, an over-reaction to the news of po-
over, the 10.2% (centered) rate of in-
tential default. Since then, we’ve learned that
crease during the last six months was
Abu Dhabi seems to have come to Dubai’s
nearly the strongest since early-1983.
rescue with a $10 billion debt guarantee.
 The Institute for Supply Management
Other developments during the month, as
reported at the end of December that
reported by Haver Analytics and Bloomberg
An economist is an ex- its barometer rose to 60, exceeding the
were:
pert who will know to- most optimistic estimate of economists
morrow why things he  The pace of the economic recovery surveyed by Bloomberg News and the
predicted yesterday did- lagged as the strength of inventory re- highest level since January 2006.

n’t happen today. building disappointed in November. The

degree of inventory liquidation and re-
— Laurence J. Peter
build has a significant influence on GDP.
 The labor market improved during No-
vember with the Bureau of Labor Statis-
tics reporting that nonfarm payrolls fell
by ―only‖ 11,000. (Payrolls need to grow
by around 200,000 jobs just to stay even
with population growth.) The payroll em-
ployment decline was the shallowest
Then, there was this opening line to close
out the month and the year...
“Dec. 30 (Bloomberg) -- Most U.S. stocks re-
treated as investors speculated the Federal Re-
serve will withdraw stimulus measures amid
growing evidence the economy is improving.”
...suggesting the irony that an improving
economy will not be good for the stock
market, at least in the short run.

since the recession began. Initial jobless As indicated in my 2010 forecast, a

claims fell by 22,000 in the week ended
Dec. 26, the lowest level since July 2008.
 Consumer sentiment began December
by retracing the declines of October and
November. The rise in sentiment was
near the highest since January of last
strengthening economy expected to lead to
a deleveraging of government debt and in-
creasing interest rates might be good news
for deficit hawks and long term economic
health, but will put a damper on the stock
market and threaten the pace of recovery.

year. According to Haver Analytics, dur- It seems investors are just not comfortable
ing the last ten years there has been a yet that the market is ready to fly on its
two-thirds correlation between the level own.

of sentiment and the three-month change

Page 7
In spite of the cost of
living, it’s still popular.
— Laurence J. Peter
L an e F in anc i a l M ana ge me nt
Market Recap
In the chart below, we see the twelve- then but trailing off considerably on Decem-
month performance of several exchange- ber 31st. Results for December were
traded and closed-end funds representing strongest for the S&P 500 and Emerging Mar-
selected investment sectors. kets, subpar for Europe and Asia/Pacific (ex.
Japan). Meanwhile, investment grade bonds
As I have reported in the past, in June, Au-
lost value while high yield bonds were very
gust and again in October, there were rela-
strong, reflecting rising investment grade
tively short-lived corrections on the contin-
yields and a tightening of the credit spread.
ued advance upward. Since I admit to my
reservations about the substance and poten-
tial extent of the economic recovery in the
U.S., I see these minor corrections as warn-
ing signals of a fragile market.
In November, upward momentum contin-
ued until the Dubai announcement the day
after Thanksgiving. Following an immediate
correction to the shock of the announce-
ment, the equity markets basically drifted in
the first half of December, improving since
A prospectus for the above funds can be obtained through this website:
http://moneycentral.msn.com/investor/research/etfs.aspx
Page 8
L an e F in anc i a l M ana ge me nt
Market Recap (cont.)
Looking at selected bellwethers represented ury bond rates brought about by the Fed’s
by ETFs in the annual chart below, basic ma- discussion of stimulus exit strategies which,
terials, technology and consumer discretion- in turn, signaled dollar strengthening. The
ary substantially outperformed the S&P 500 graph below shows a highly (though hardly
for the year while financials lagged. perfect) negative correlation between
movements in the 10-year Treasury bond
In this monthly chart, we see real estate
rate and the gold ETF over the last three
years (past relationships cannot be de-
pended upon to continue).
Get your facts first, and
then you can distort
them as much as you
please.

— Mark Twain
(largely commercial), technology and basic
materials all have the strongest month.
Gold, on the other hand, reversed some 7%
for the month. This was attributable, in my
view, to the increase in the 10-year Treas-

A prospectus for the above funds can be obtained through this website:
http://moneycentral.msn.com/investor/research/etfs.aspx
 Page 9
L an e F in anc i a l M ana ge me nt
Momentum Watch
This section highlights various technical
measures of momentum. These measures
are not unique and vary depending on the
subject and time period. Caution on reli-
ance is advised in the same way that caution
would be advised for fundamental analysis.
That said, I use momentum indicators to
inform trading decisions and fundamental
―Fundamental analysis economic analysis to inform longer term or
explains currency move- secular views.
ment in terms of macro-
On the chart of the S&P 500 index on the
economic variables such
top of the next page:
as growth, inflation,
monetary policy, etc.  Momentum, as measured by 75- and
One of the weaknesses 150-day exponential moving averages
of fundamental analysis is (EMA), remains positive. The weaken-
that it says very little ing momentum that appeared in No-
about the timing of vember gave way to continued improve-
moves and risk manage- ment in the second half of December on
ment. a spike in volume.
Timing is an important  The spread between the daily price and
part of risk management. the 75-day EMA widened in a bullish
Even rudimentary techni- move.
cal analysis can help in-
 The MACD (another indicator used to
vestors fine-tune their
measure direction and strength of mo-
entrance into an invest-
mentum) began to change course at the
ment and help quantify
beginning of October and appears to be
the risk. Monitoring the
weakening once again.
price action itself will
 The resistance line at 1000 has been
likely reveal a higher
handily exceeded and now forms a sup-
probability of successful
port to a potential correction. I’ve
opportunities….‖
placed my next resistance line at 1200,
— Journal of Indexes
near the bottom end of the range of my
year-end prediction of 1200-1300.
The second chart shows comparable infor-
mation for the MSCI Emerging Markets in-
dex.
 The 75– and 150-day EMAs remain posi-
tive, though not as aggressively so as the
S&P 500.
 The MACD turned bearish around the
beginning of November and continues
to have that tilt, though not excessively
so.
On the top of page 11, another chart shows
a nearly 30-year weekly value of the S&P
500 index along with a 50- and 75-week
EMA and the MACD (with different parame-
ters than on the previous page). Notice
how well future price direction is
―predicted‖ by crossovers of the price and
the EMA line once the slope of the EMA
changes.
While it’s true that a substantial portion of
the advance since last March would have
been missed had one followed this indicator,
it is also true the decline from the beginning
of 2008 would have been avoided for more
than a net positive result. Following the
MACD at extremes would have also given a
very favorable result, although there was
greater potential for false starts.
At the bottom of page 11 we see a compa-
rable chart with a faster moving average to
indicate momentum over a shorter period.
Here we also see positive momentum, but
perhaps with less conviction as the slope of
the EMA, though still positive, is not as
strong as on the longer timeframe chart.
Page 10
L an e F in anc i a l M ana ge me nt
Technical Analysis (cont.)

I have left orders to

be awakened at any
time in case of na-
tional emergency,
even if I’m in a cabi-
net meeting.

— Ronald Reagan

The S&P 500 and the MSCI Emerging Markets indexes are unmanaged indexes which cannot be invested into
directly. Past performance is no guarantee of future results.
Page 11
L an e F in anc i a l M ana ge me nt
Technical Analysis (cont.)

The secret to creativ-

ity is knowing how to
hide your sources.

— Albert Einstein

The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of
future results.
Page 12
L an e F in anc i a l M ana ge me nt
My Bottom Line
2009 was a teachable moment, and I expect
2010 will be, as well. In 2009, we learned
that governments around the world will in-
tervene aggressively to stave off, or repair
from, a deep recession. And we learned
that it worked (so far).
In 2010 (or 2011), we will learn whether the
global stimulus was enough to rekindle
economies (some will surely benefit more
Frankly, I am suspicious
than others) for sustainable growth. And,
of anyone who has a
we will learn how governments will deal
strong opinion on a com-
with the humongous deficits created to pro-
plicated issue.
vide the stimulus and the impact of these
— Scott Adams (Dilbert actions on securities markets.
cartoonist)
I’ll continue my 2010 forecast with these
thoughts. With regard to the U.S. economy
and stock market, my suspicion is that the
following will occur:
 The impact of already committed stimu-
lus payments will keep the ―green
shoots‖ coming through the first half of
the year and maybe through the third
quarter, as well
 Congress will pass a ―jobs‖ bill in early
2010 that will add more fuel to the
economy
 Remaining and new stimulus programs
will put more money in the hands of
consumers than did earlier stimulus
(that largely went to large financial insti-
tutions only to stay there), boosting
consumer spending
 The S&P 500 as well as small and mid-
cap stocks will do reasonably well
through the first 3 quarters of the year,
especially technology and basic materials
 By the fourth quarter of 2010, there will
be enough ―green shoots‖ and/or the
pressure from deficit hawks will be so
strong that the Fed will begin gradual
tightening, hoping to avoid a shock to
the system as a result of tighter credit
 But a shock will occur since the false
nature of the economic and market
gains in the years leading up to October
2007 (based as they were on extremely
lax credit standards and profits in the
financial sector derived from discredited
products) cannot be papered over; new
industries will need to be created and
nurtured
 The U.S. stock markets will seek a new,
lower trend line as the ―new normal’
predicted by Mohamed El-Erian of
PIMCO comes into focus.
Meanwhile, while I suspect a comparable
result will occur in other developed econo-
mies (especially in Western Europe), emerg-
ing and developed economies in Asia/Pacific
(excluding Japan) and Latin America will gen-
erate the greatest share of global growth
because:
 A global economic rebalancing will be
driven by greater self-reliance and trad-
ing within their own sphere and
 Their political systems are less ham-
strung than those of the West and,
therefore, can address local problems
more quickly.
** *** **
Best wishes for a healthy, happy and pros-
perous New Year.
Page 13
L an e F in anc i a l M ana ge me nt
Disclosures
Lane Financial Management is a Registered Investment Adviser with the States of NY, CT
and NJ. Advisory services are only offered to clients or prospective clients where Lane
Financial Management and its representatives are properly licensed or exempted.

No advice may be rendered by Lane Financial Management unless a client service agree-
ment is in place.

Stock investing involves risk including loss of principal. Investing in international and
Emerging Markets may entail additional risks such as currency fluctuation and political in-
stability. 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 ad-
versely affect the value of these investments.
In the eyes of public
opinion, the contrarian Investors should consider the investment objectives, risks, and charges and expenses of
investor faces a lose- mutual funds and exchange-traded funds carefully for a full background on the possibility
lose proposition. When that a more suitable securities transaction may exist. The prospectus contains this and
contrarian approaches other information. A prospectus for all funds is available from Lane Financial Management
fail to keep pace with or your financial advisor and should be read carefully before investing.
the current market
darling, more- Note that indexes cannot be invested in directly and their performance may or may not
fashionable players correspond to securities intended to represent these sectors.
mock the out-of-step
thinker. When con- Investors should carefully review their financial situation, making sure their cash flow needs
trarian approaches sur- for the next 3-5 years are secure with a margin for error. Beyond that, the degree of risk
pass the alternatives, taken in a portfolio should be commensurate with one’s overall risk tolerance and financial
consensus-oriented objectives.
players decry the irre-
sponsibility of the un- Periodically, I will prepare a Commentary focusing on a specific investment issue. Please
conventional inves- let me know if there is one of interest to you. As always, I appreciate your feedback and
tor. look forward to addressing any questions you may have. You can find me at::
www.LaneFinancialManagement.com
— David Swenson,
Yale University Endow- Edward.Lane@LaneFinancialManagement.com
ment Fund Portfolio
Manager Edward Lane
Lane Financial Management
P.O. Box 666
Stone Ridge, NY 12484
917-575-0299

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