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Lane Asset Management 2010 Review and 2011 Forecast

Lane Asset Management 2010 Review and 2011 Forecast

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Published by eclane
Stock market recap for December and all of 2010 and economic and stock market forecast for 2011
Stock market recap for December and all of 2010 and economic and stock market forecast for 2011

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Published by: eclane on Jan 05, 2011
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01/05/2011

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Happy New Year 
 
Recap for December and all of 2010
Following hiatus in November, December turnedinto a strong month with the S&P 500 deliveringhalf of its annual gain and emerging markets rackingup nearly a third. During the month, many eco-nomic indicators showed continued improvementand political gridlock in the U.S. gave way to bipar-tisan support for tax relief. On the other hand,fixed income investments and gold finished themonth more or less where they started.The year as a whole was volatile. As shown on thechart on the next page, the equity markets took an early hit in January, advanced strongly until a sell-off occurred in mid-April, picked up steamthrough October and continued their upwardmarch through the end of year.Looking at the S&P 500 alone, it advanced nearly9% into April, then declined about 16% through July, then advanced nearly 23% to close out theyear with a 12.8% gain for the year.Meanwhile, gold advanced more or less steadilythroughout the year, closing up nearly 30%Global bonds advanced nicely through October,then lost steam to close out the year with about a6% gain. Europe ended the year up about 2.3%.The surprising result for me in 2010 was theweaker than expected performance of the emerg-ing markets. Despite GDP growth more thantwice that of the U.S., emerging markets as awhole exceeded the S&P by only about 25%(better in Asia/Pacific and worse in Latin America).Looking back, I think this might be explained bytwo factors: First, approximately half the profitsfor the S&P 500 companies come from abroad. Sogrowth in emerging markets coupled with a declinein the dollar would naturally benefit the S&P 500 aswell as emerging market stocks.Second, the equity performance of the more rap-idly developing economies of the emerging marketsover the last three years substantially exceededthat of the S&P 500. Therefore, when these econo-mies began to introduce measures to contain theirinflation, it was reasonable to expect their relativeout-performance to diminish.So , what drove the markets in 2010? First, noticea high degree of correlation among the equity mar-kets (especially the U.S., Asia/Pacific ex Japan, andLatin America) even though the total returns dif-fered. In 2010, there were several macro andtechnical issues that seemed to have the greatestimpact on the equities across the board:
Despite the general lack of serious bad news,the January dip, I suspect, was fear overcominggreed (also know as profit-taking) on the heelsof the strong upswing over the prior tenmonths. (Are we looking down the barrel of the same gun today?)
For the next two months, once the mini-
correction had taken place, the “risk 
-
on” trade
was back as generally positive economic news
2011 Forecast and Stock Market Commentary
 January 1, 2011
Lane Asset Management
The great recession of 2008-2010 (and counting) hasproven to be a challengingperiod for investing
 — 
and alearning experience. Mostbroad equity markets arestill down substantially sinceOctober 2007, though theyhave substantially recoveredsince the bottom in late2008.Today, the developedeconomies are confrontingeconomic recession andsoaring debt problems whilethe emerging economies areconfronting growth-inducedinflation. In both cases, level-headed solutions result in
slowed growth, but it’s not
clear that those will be ap-plied in all cases.This adds up to the need fora more nimble and focusedinvestment process in the
coming year. Here’s wishing
you a healthy and prosper-ous New Year.
 — 
Ed Lane
drifted out without interruption.
Then, around mid-April, the markets took a nosedive as China took several steps to cool inflation.This caused concern to spread that other rapidlygrowing emerging economies would be followingsuit, potentially causing a global slowdown.
Toward the end of June, markets began to re-cover as fears of a double-dip recession subsidedwith increasing industrial production and con-sumer confidence numbers.
Markets cooled in November as the dollargained strength against the Euro and concernsarose about falling exports as austerity measureswere introduced in the U.K. and Europe.
The year ended strongly in December as politi-cal gridlock took a holiday in the U.S., good eco-nomic news continued, and the world shook off 
China’s second rate hike.
 
Gold continued in a “flight
-to-
safety” advance that
began in the Fall of 2008 coincident with the bank bailout and other crisis maneuvers to stem the ef-fects of the recession. Silver (not shown) had aneven more dramatic rise of over 80% for the year.Through it all, global bonds did well most of theyear as U.S. Treasury rates declined and short-termrates were held near zero. Then, when the dollarbegan to rise against developed market currenciesat the beginning of November, interest rates re-versed their downward course, bonds began to selloff, and bond values declined.
 
Past performance is no guarantee of future results.Page 2
Lane Asset Management
2010 Index Comparisons
 
2010 Forecast
 — 
How did I do?
 In what follows, I repeat my expectations for 2010as they were provided in my Stock Market Com-mentary a year ago and provide a brief analysis onwhat actually occurred
italicized in red 
. From lastyear, I said:
...I’m inclined to go along with the majority opinion of the
market strategists, namely, that the U.S. market will bepositive for the year with the best part of the performanceoccurring in the first half of the year.
Following a weak Janu-ary, the S&P 500 improved through mid-April, declined through June, and steadily improved through the end of the year, closing out the year near the YTD high.
My 2010 forecast reflects the ying and yang of the U.S. mar-ket in 2010 as I see it.
On the one hand, stimulus payments and foreign-earned profits will push the S&P 500 higher, perhapseven higher than conventional wisdom, to a range of 1200-1300.
In fact, this rationale proved accurate and theS&P ended the year nearly1258.
 
On the other hand, the brakes will come on when defi-cit reduction plans and activities become more clearand imminent.
This occurred in Europe with a dampening impact on the markets, especially during April through Juneand toward the end of the year.
 
The saving grace for the market in 2009 was massiveglobal central bank intervention. Since over half of al-ready approved U.S. stimulus remains to be distributedin the first half of 2010 and more may come, the stimu-lus will have its desired effect on consumption and willboost market performance.
While the extent of the
“boost” to the markets is arguable, many feel the stimulusdid prevent a “double dip” recession. Deeper analysis sup-
ports positive economic results throughout the year.
 
Sooner or later, as recovery appears to be more immi-nent (or deficits too large to ignore), the Fed will beginto withdraw liquidity from the system or, at least, signalthat that moment is nigh. Ironically, when this happens,
it’s likely to place a strain on the market as interest
rates increase and credit conditions tighten. That said, I
don’t expect this will occur much sooner than late
2010.
Though concerns
 — 
and interest rates
 — 
are increas-ing, fiscal tightening has yet to occur in the U.S. Europe, onthe other hand, is currently going through retrenchment inthe wake of sovereign debt and bank credit problems and new austerity measures.
Domestically, technology, large cap, consumer discre-tionary, basic materials and medical devices are likely tobe among the best performers.
Technology, consumer discretionary and basic materials all outperformed the S&P 500, while large cap (S&P 100) and medical devices under-performed.
 
From a regional standpoint, emerging markets and Asia/
Pacific (excluding Japan, “AxJ”), though more volatile,
are likely to outperform the S&P 500 and other devel-oped markets for the foreseeable future.
Both marketsoutperformed the S&P 500, but by less than 5 percentagepoints, and they were both more volatile..
 
I’m ambivalent about the dollar. Weakness is in U.S.
interests in that it stimulates exports and fattens foreign-earned profits. On the other hand, as the Fed unwindsstimulus and deficit hawks gain the upper hand, risinginterest rates will strengthen the dollar. Bottom line, Isee the dollar strengthening by the end of the year.
Thedollar strengthened through mid-year, declined until Novem-ber, then bounced back to end the year nearly where it be- gan, up 1.3% above other developed economy currencies..
 
I have become less enthusiastic about gold. With “pushme, pull you” influences and interest rate risk to theupside, gold’s expected performance is too unpredict-
able to continue my previous bullish stance.
Gold did 
2010 Forecast Review
Lane Asset Management
extremely well in 2010, gaining 28%. I missed that one.
 
Quality and high yield income securities of short and in-termediate duration (conventional and convertiblebonds and preferred stocks) will provide reasonable re-turns with limited volatility. That said, the prospect of increasing interest rates, could put these funds(especially investment grade) under price pressure.
Thisturned out to be true with bonds and other income-oriented securities performing very well through October, then deterio-rating for the balance of the year..
 Despite stimulus, difficulties will remain in the domestic
economy. Ultimately, the economy can’t fully recover until
final demand is restored (consumer spending accounts forabout 65% of GDP). Stimulus spending will support demandfor a period of time, but no one believes that can continueindefinitely. The hope, I suspect, is that the stimulus willprovide a catalyst for a more self-
sustaining economy. We’ll
see.
 
I’d say this turned out to be true as unemployment remains
high, the housing market remains in the doldrums and GDP  growth remains below trend and typical post-recession levels.
 ...I expect new unemployment insurance claims to continueto decrease and the number of new jobs created to steadilyincrease, though not enough to bring the unemploymentrate below 9% by year-end.
Unemployment claims are de-creasing, hitting a 2 1/2 year low in late December while the un-employment rate remains close to 10%.
...I believe the 10-year Treasury bond rate will continue toclimb, perhaps to 4.5%, while consumer credit continues tocontract, both unfavorable to the economy and the marketin the short run, at least.
The 10-year T-bond ends the year  yielding just under 3.4%; outstanding consumer credit declined throughout most of the year with a bit of a spike at the end of the year.
** *** **All in all, not a bad record.
Page 3

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