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Lane Asset Management Stock Market Commentary November 2010

Lane Asset Management Stock Market Commentary November 2010

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Published by eclane
Updated technical analysis of stock market
Updated technical analysis of stock market

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Published by: eclane on Nov 05, 2010
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11/05/2010

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Market Recap
October was a good month for equities as the S&Prose nearly 3.7% and the Emerging Market indexrose a more modest 2.8%. This is a good showing,
especially in light of China’s incremental interest
rate hike that caused a very short-lived hiccup inworld markets. For the year, the two indexes areup a little over 6% and 11%, respectively, throughOctober.
 Economic Outlook 
The U.S. economic outlook remains depressedwith stubbornly high unemployment, weak housing,weak retail sales, and improving but still weak con-sumer confidence and leading economic indicators.GDP grew at an annual rate of 2% in the thirdquarter, 1.4% of which was due to inventory build-up. What is important about this is that ultimatesales of this inventory will not contribute to GDP
growth as inventories are liquidated. So don’t look 
for a blowout 4th quarter on GDP.Now that the mid-term elections are over and theGOP gained control of the House of Representa-tives, hope springs eternal that the economy willimprove on the strength of extension of the Bushtax cuts and furtherance of the GOP agenda of 
smaller government. The Fed’s announcement of 
$600 billion of Treasury bond purchases underQE2 adds fuel to this euphoria. I wish I could buyinto this euphoria
 —but I can’t.
The U.S. economy suffers from a burst asset bubblethat stoked the fire of consumerism. Now that the
 
illusory wealth has been eliminated, there are fewoptions to restore domestic economic growth.Those depending on the extension of the tax cutswill be disappointed, I believe, since no additionalwealth creation will occur upon passage (perhaps
avoidance of some wealth “destruction” if the
wealthy participate in the extension might help, butI doubt it). If Washington avoids making bold in-vestments (such as those being by our competitorsin Asia and Latin America), as I regret they probablywill given the outcome of the election, organicgrowth in the U.S. will, at best, continue to be of the green shoot variety. that is, modest best.On the other hand, and this is important for inves-tors, the Emerging Market world in Eastern Europe,Latin America and, especially, Asia (excluding Japan)are not hamstrung by the same political and eco-nomic issues that affect the U.S. As a result, invest-ments in those countries are being made, buildingnational income in the doing as well as laying thegroundwork for economic strength in the future.
Investment Outlook 
 I see the investment outlook as follows:
For U.S. equities, the picture is not as bleak asthe economy since domestic companies are tak-ing advantage of foreign, especially emerging,markets. I recently heard that now nearly 50%of profits of large and medium U.S. companies,up from 40%, come from overseas. The growthin those economies and the decline in the dollarboth contribute to higher profits for domestic
Stock Market Commentary
November 4, 2010
Lane Asset Management
Bubbles. Are we in one?The S&P had a another goodmonth in October and isnow over 6% up for the yeardespite gloom and doom re-ports about the U.S. econ-omy. The gold index is upover 23% for the year andnearly 80% over the last twoyears. While there are mar-ket analysts that say we arein a bubble and this cannot
last, they’ve been saying that
for a while. While I do takeheed of these comments, abetter approach for invest-ing, I think, puts greater em-phasis on technical analysis.As always, I welcome yourcomments and suggestions.
 — 
Ed Lane
companies. Ultra low interest rates in the U.S.also enable companies to borrow to repurchaseshares, thus boosting per share earnings at lowcost.
As strong as U.S. companies are, growth inEmerging Markets, especially Asia (ex Japan) con-
tinues unabated. From PIMCO, “Many corpora-
tions in emerging Asia are global market leadersand have demonstrated a strong track record of withstanding economic cycles. In addition, manyoffer attractive yields and risk-
return profiles”.
 
The QE2 announcement strengthens the casefor a continuing decline in the value of the dollar(as if one was needed). Therefore, commodities,especially precious metals, will continue to dowell though there is the potential for periodicpullback as investors take profits.
I am turning cautious for investments in the in-come-oriented space as bond yields move closerto lower bound. Better opportunities can befound in global preferred stocks and master lim-ited partnerships.All in all, I am a little cautious if only because themarket has had such a strong advance since the be-ginning of September wiping out the May-Juneswoon. The charts on the following pages provideselected technical analysis of these markets. As al-ways, investments carry a degree of risk. Technicalanalysis, though not perfect, can be very helpful inthe decision-making process by showing underlyingtrends irrespective of market commentary.
 
The S&P 500 index is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.Page 2
Lane Asset Management
The S&P 500 index continued the advance begun in September and a line of resistance by the end of October.On a technical basis, the 75
 – 
and 150-day moving averages have turned positive and the MACD (another mov-ing average-based momentum indicator) continues on the bullish move begun in July with a little weaknessshowing at the end of October. The index is now approaching technical resistance at about 1200 which givessome reason for caution (even though we know the first few days of November were very positive). At thispoint, giving due regard to the economic headwinds in the U.S. and other developed economies, but also keeping in mind the stronger econo-mies in the Emerging Markets, especially Asia, it is premature to get overly excited about the sustainability of the current uptrend in the S&P500. The caution light is out and any additional exposure to U.S. equities should be entered into slowly and carefully with the understandingthat a pullback of 10% or so would be consistent with the pattern established over the last 12 months.
 
S&P 500 Index
 
The MSCI Emerging Markets index is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.Page 3
Lane Asset Management
The MS Emerging Market Index has sustained the bullish stance from last month consistent with the relativestrength of the Emerging Market economies, especially Asia/Pacific (ex Japan). The 75
 – 
and 150-day moving averagesare more clearly upward sloping with increasing separation between the 75-day average and the longer term 150-dayaverage. However, the MACD, a shorter term indicator, began to weaken in mid-month. A very positive sign is theretention of the breakout above the resistance line at 1050, turning this line into a support level. Given the generallypositive technical indicators and fundamental outlook, equity additions in Emerging Markets are advised. That said, no sys-tem is perfect and past performance cannot be taken as a guarantee of future results. At this moment in time, I am prepared to retain agreen light on Emerging Markets keeping in mind that reversals have occurred several times at current levels and cannot be ruled out.
Morgan Stanley Emerging Market Index

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