September 5, 2011

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Recap August began with a downward revision to the second quarter GDP growth figure from 1.3% to 1.0% and global GDP figures also showed weakness. This news was taken as a signal that the world, at least the developed economies, were coming perilously close to dipping back into recession and many market analysts were raising their probabilities of a double dip as if the first recession had ended. Although the market recovered a bit during the rest of the month, weak economic news continued leaving one to wonder whether the recovery, such as it was, was nothing more than a technical reaction to a sudden oversold condition. (Truth be told, we know there was further decline in the first two days of September following the Au

gust jobs report.) Simply put, there was very little good news in August aside from an increase in consumer spending and durable goods orders. Broader indicators, such as the Philly Fed and the Empire Economic Indices, capital expenditures, the Case/Shiller home price index, consumer confidence, and the July non-farm payrolls, all were weak or declined to multi-year lows.

nearly 18% but recovered to a 10% loss for the month. On the heels of a strong month in July, silver initially gave back some of its prior gains, but ended the month up over 4%. Gold barely took a breather from a strong July, then added another 12% to bring its 2011 gain through August to over 28%.

If youve been following my comments for the last several months, youll know that Ive been concerned about whether the market correction begun in April was just a technical blip or the beginnings of a more serious decline. With the sharp selloff at the beginning of August, possibly triggered by a disappointing GDP growth figure for the second quarter, I was just about to claim a serious correction was underway. Looking at the chart on the right, the S&P 500 and emerging market indices stabilized and actually recovered a bit later in the month. This caused me to hesitate with my prediction. With the S&P stuck around the support/ resistance level of 1200, we are at a critical point that will determine whether a further decline of 10% or more is in the offing or not. With political ineffectiveness here and in Europe, Im concerned the odds favor further decline. Comments are welcome. Ed Lane

The S&P initially dipped 13% but later recovered over half the loss to end the month down nearly 5.7%. The emerging markets index fared worse dropping an initial 15% and recovering to a near 9% loss for the month. On the expectation of recession, oil fell

As investors dumped equities, bonds continued their slow but steady upward grind by adding another 2% in August. U.S. Treasury bond rates fell again to all time lows with 10 year rates dropping to very nearly 2% (a low not seen in 50 years) from 3.75% in February as investors rushed to safety. (cont.)

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Economic Outlook The economic outlook remains weak. Here are the factors that concern me the most (in no special order):

the problem through public and private austerity and deleveraging. While this is an effective way to deal with the debt, it exacerbates the employment problem and depresses economic growth. If a more creative solution isnt found, the so-called muddle through economy is the best we can hope for for many years to come.

This correlates highly with equity values. The big question is whether the economic headwinds in the developed economies will overwhelm corporations ability to keep profits high. Investment Outlook Long term investors might conclude that the current market slump presents a buying opportunity, and they may be right. That said, I would point out that many long term investors in 1998 would find that their investments had not changed in value over the last 13 years. Of course, thats not true for all equities, but finding long term winners in a diversified portfolio is not easy. To wit, Investment News reports that only 13% of mutual funds beat their benchmarks so far in 2011. Unless you can stand the volatility, I would be very careful about adding equity exposure at this point in time. My current suggestions are: basically the same as last month:

Housing: The Case/Shiller index of property values fell 4.5% from a year ago. On the bright side, the figures from a year ago were inflated by special tax credits for new home buyers and the index has been relatively stable over the last 3 months. Regardless, the underlying problems remain with too much housing stock and too few willing and able buyers. Since Americans measure their wealth, in part, on the value of their homes, consumer confidence remains under pressure. And until the housing problem is resolved, our consumer led economy will struggle. Employment: Forget the unemployment rate. The labor force participation rate and the employment to population ratio dropped to their lowest levels since the early 1980s. And long term unemployment, which has reached new heights, will exacerbate the employment picture and economic well-being for millions of Americans for years to come. European debt: The sovereign and bank debt crisis in Europe threatens the entire financial world. Fundamentally, according to those I read, there are only three ways out of the mess: currency devaluation and/ or debt restructuring and/or severe public austerity. Since none of these approaches are politically palatable at the moment, the crisis persists. But there is a limit to how long this can go on. American debt: The U.S. also has its debt issues, both public and private. Aside from currency devaluation which has its own set of issues, America is dealing with

Political deadlock: Focusing on the U.S., the fundamental disagreement over the role and ability of government to resolve the economic malaise (primarily unemployment) has, so far at least, become a selffulfilling prophecy. At the risk of over-simplification, one side feels the need for substantial government stimulus while the other side feels the need for reduced government intervention and greater reliance on the private sector to do its thing. While both points of view have merit, neither can get off the ground on account of an unwillingness to compromise. Over the next few weeks and months, Congress and the Administration will have one last opportunity to deal with the problem before the 2012 election. From what I can see, there is little evidence to point to that suggests this opportunity will be seized upon.

High quality, dividend paying common or preferred stocks High grade corporate and government global bond funds, especially U.S. TIPs (inflationprotected Treasuries) Gold (see pages 3 and 4) For taxable accounts, municipal bond funds.

Meanwhile, from an investors perspective, the news isnt all bad. Since equity values are fundamentally based on the current and perceived future financial success of companies, as long as corporate profits remain strong, despite these other factors, equity markets will thrive. As it happens, S&P 500 earnings per share and adjusted after-tax corporate profits as a percent of GDP are at prerecession levels, probably owing to the globalization of business and the productivity that derives from a greater reliance on capital than labor (lowered employment).

Given the extreme economic uncertainty and market volatility, I no longer recommend covered calls.

L a n e A s s e t M a n age m e n t
Gold
There has been a lot of discussion about gold as an alternative investment. While Ive talked about the technical aspects of golds performance in previous commentaries, I thought it would be useful to step back and provide some thoughts on gold as an investment and where it might go from here. First of all, it is important to remember that gold is not an ordinary investment. It does not have an earnings yield so its only value to an investor is determined by what you get back when you sell. The next important thing to remember is that gold has limited industrial use. That means the

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main demand for it comes from the love trade and investors. Although the love trade in Asia is growing rapidly and jewelry represents the largest current source of demand for gold, in my opinion, the price of gold lately is more influenced by investor demand (which also happens to be the fastest growing source of demand). From my perspective, an investor in gold needs to take into account both the technical analysis of its price direction and the fundamental factors that drive the demand. Typically, supply and demand have the greatest impact on commodity prices. In the case of gold, as I understand it, the supply is rather tight and is growing at a relatively stable pace and short of demand. That means, absent a supply shock, that demand factors have the greatest impact on price. Based on my research, these factors are what drives the growing demand for gold:

The first is a real or expected decline in the value of the currency that is exchanged for gold or the basis for other investments. The graph on the next page illustrates the comparative performance of the U.S. dollar and the price of gold. Although not shown, if you compared the change of the price of gold in dollars to the change in value of a stronger currency, like the Swiss Franc, in dollars, you would get a much more muted picture of golds advancing price. Real and expected declines in the value of the dollar have been a major source of demand for gold from individuals, institutional investors and central banks (who, according to Bloomberg, are the largest holders of gold), especially if they hold large quantities of other assets denominated in dollars, like U.S.Treasury bills or weak currencydenominated debt. Given the economic turmoil in the U.S. and the widespread holdings of U.S. dollars, this factor is likely to continue to be a driving force behind the price of gold, at least in the near future. The second factor, closely related to the first, is demand from investors and speculators who simply want to ride the curve. Typically, this demand comes from investor fever or from supportive technical analysis. This might also be seen as demand that feeds upon itself that has been made that much easier with the advent of easily traded gold mutual and exchange-traded funds. This is the stuff of which bubbles are made. As seen in the graph on the next page, the meteoric rise in the price of gold since 2001 along with the corresponding increase in volume that really picked up with the advent of the current recession and has been increasing ever since, leads some technical analysts to conclude that a bubble is in the making and a correction may not be far behind. The last factor I see is political and/or economic uncertainty. As gold is considered a safe haven in times of stress, there seems to be little question but that the current recession and political environment has played a role in the demand equation.

If these are the factors that drive the price of gold, then it is important to recognize that they are all reversible. Again, unlike a traditional investment (stocks or bonds) that have inherent value and can be diversified to minimize the impact of specific security risk, the demand driven price of gold can reverse and stay negative for a long time as actually occurred over the period from roughly 1980 to 2001. Therefore, any investment in gold should be watched carefully and restricted to a manageable percentage of ones portfolio.

L a n e A s s e t M a n age m e n t
Gold

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This chart shows the performance of the gold index created by stockcharts.com that is intended to represent the price of an ounce of gold and is a very close approximation to the value of exchange-traded funds that hold these metals. This unmanaged index cannot be invested into directly. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
S&P 500 Index
The S&P 500 index fell through support at 1300 and even broke through the next level of support at 1200 before recovering late in the month. On a technical basis, the 75 and 150-day moving averages have turned decidedly negative. Both the top (shorter term) MACD (another moving average-based momentum indicator) and the longer-term bottom MACD remain negative with a continuation of their downward slope. If there is a positive note to be made, the shorter term MACD looks like it reached an oversold condition with the potential of a recovery of some type. But, in my view, theres not enough here to rely on (see October 2008).

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At this point, giving due regard to the economic and political challenges in the U.S. and other developed economies, it is difficult to be enthusiastic about the near term prospects for the S&P 500. The key for the coming months will be the extent to which the political deadlock gets resolved followed by third quarter corporate profits that will come out in October. Since the 75-day moving average has crossed over the slower 150-day average, I have become decidedly more negative. While 1200 could represent a buying opportunity, I would be extremely cautious given the economic and political backdrop. Until something positive shows up, I remain in the red light mode.

The S&P 500 index is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
Morgan Stanley Emerging Market Index
Similar to the S&P 500, the MSCI Emerging Market Index collapsed in August, falling through its support line at 1050. The 75 and 150-day moving averages have now turned decidedly negative with the more ominous outcome of the faster 75-day average crossing over the slower 150-day average. Both the shorter term top MACD and the longer term bottom MACD have moved convincingly negative. Given these technical indications, and with the economic issues confronting the developed market customers of the emerging market economies, I would not be comfortable making a significant commitment to emerging market equities at this

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time. As with the S&P 500, some will see the current dip as a buying opportunity. To me, there are too many negative factors to arrive at that conclusion. Perhaps once the emerging markets shift to a greater focus on internal consumption rather than exports, conditions will be in place for a lasting recovery in these markets.

The MSCI Emerging Markets index is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
Barclays Capital Global Bond Index
The Barclays Capital Global Bond Index represents the total return (capital gains and interest income) of a composite of domestic and international government and corporate bonds and similar instruments. As such, it blends bond yields available globally along with the impact of currency fluctuations. As shown in the chart below, this index has a steady upward momentum with very low volatility. It should be noted that the performance of the securities in this index have been a beneficiary of declining interest rates and decline in the value of the dollar,

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producing capital gains along with interest income. The index received another boost in August as investors, concerned about declining GDP growth, fled from global equities. For the portion of a portfolio where capital preservation has a high degree of importance and also to provide diversification, an allocation, even an overweight, to a global bond portfolio would be appropriate. On a technical basis, the 75-day moving average continues to be very positive (and effective as a line of support over the charted period) while the MACD indicator is showing a little renewed strength. As it is, this could be a good place to park money peeled off developed and emerging market equities. The Feds commitment to keep short term interest rates low for the next two years bodes well for global bonds in that concern about rising rates depressing bond values can take a breather. Even more helpful is the possibility of the Fed buying longer term Treasuries as its next exercise in quantitative easing.

The Barclays Capital BondGlobal Index is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
Gold and Silver
The chart below shows the 5-year monthly performance of gold and silver indexes, along with a comparison of the performance of a U.S. dollar index. The chart shows a generally inverse correlation in the price of the metals against the value of the dollar except for the period November 2009 through May 2010 when the dollar advanced as did the price of the precious metals. The inverse correlation is understandable as the metals can be

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seen as a safe alternative to fiat currency (see page 3). But other factors are clearly at play as the metal prices have advanced far more than the value of the dollar has declined. The primary answer, I believe, has to do with supply and demand imbalances caused by market and geopolitical uncertainty. If thats the case, then a good argument can be made for continuation of strong performance in these (and other) precious metals as long as governments (and others) around the world stockpile these metals as a hedge against future inflation or as an alternative to holding dollars. That said, as shown in 2008 and again in April and May, the value of silver can be quite volatile and can contract rapidly. On the other hand, gold continues its more measured track upward. To me, gold continues to be the more attractive investment.

This chart shows the performance of gold and silver indexes created by stockcharts.com that are intended to represent prices of the precious metals and is a very close approximation to the value of exchange-traded funds that hold these metals. These unmanaged indexes cannot be invested into directly. Past performance is no guarantee of future results.

L a n e A s s e t M a n age m e n t
12-month Index Comparisons
The chart below shows the 12-month performance of selected indexes. Several observations can be made:

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A high degree of correlation continues to be seen among the equity indices in the U.S., Europe and emerging markets. Thus, there may be little to be gained from diversifying among these geographies on a technical basis alone. It seems European stocks may be catching on to the sovereign debt issues among the Club Med countries with the more rapid correction since May relative to the U.S. and emerging markets. As pressure mounts on Germany to both backstop the weaker Eurozone countries and to cope with its own challenging export environment, this has weighed heavily on European stocks generally. Over the last 12 months, U.S. stocks have outperformed both emerging markets and Europe, both of which are barely changed over the last year. Oil had its comeuppance in July and August as fears of a global recession have gained strength. Global bonds continue to turn in a respectable performance with low volatility. After more or less keeping pace with equities for the first 10 months of the last 12, gold has taken off in the most recent two months as concerns about recession and political ineffectiveness have reached new heights.

Past performance is no guarantee of future results.

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L an e A ss et M an ag em ent
Disclosures 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 Lane Asset Management P.O. Box 666 Stone Ridge, NY 12484