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Lane Asset Management Stock Market Commentary December 2011

Lane Asset Management Stock Market Commentary December 2011

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Published by Edward C Lane
Economic and stock market commentary for December 2011
Economic and stock market commentary for December 2011

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Published by: Edward C Lane on Dec 12, 2011
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Market Recap
A “Tarzan market, swinging this way andthat,” is what one analyst called the recent
market and it certainly rings true for the lastsix months, especially the last four. So, whatdoes it all mean? In my book, investors are
afraid, and with good reason. They’d like tobelieve the market’s recovery between, say,
March 2009 and May, 2011 (over 85% increasein the S&P 500 during that period) representsa reliable indication of potential growth tocome and would even be satisfied to acceptsomewhat less. Then along comes increasinglydire predictions of a financial calamity inEurope with global implications and the mar-ket turns from the long view to one that is
 
headline driven.
After falling over 7% in the first 27 days of the month, the S&P 500 (SPY) recoverednearly the full amount to end just slightlydown for the month and closing just under 1% increase for the year-to-date. Emergingmarkets (EEM) and Europe (IEV) were evenmore volatile in November losing roughly12% and 13% before recovering to closedown only (sic) 2% and 3%, respectively, for the month (though they are still down over 15% and 10% for the year, respectively).
Oil (DBO) continued its winning ways, add-ing about 9% for the month, but it is still upless than 2% for the year.
Stock Market Commentary
December 7, 2011
Lane Asset Management
 Well, in case you haven’tnoticed, it’s all Euro, all
the time. The Europeandebt issues have been atop story in the press andthis has a great many peo-
ple worried. While it’s im-
possible to attribute mar-ket performance to justone issue no matter how
big, it’s likely that the Euro
crisis has taken a toll on
the world’s equity mar-kets. But here’s what I
find curious. The S&P 500is basically flat for the year.If a collapse of the Eurohas the potential to createanother financial disaster,
shouldn’t the market be
anticipating this more thanit seems to be? So, either 
the market doesn’t think 
the crisis will get that far or, what is also possible,
the market doesn’t believe
the impact will be as greatas advertised. Stay tuned.Comments welcome.
 — 
Ed Lane
Gold (GLD) wavered throughout the monthagain, and closed up a bit less than 2% (andover 22% for the year).
The aggregate bond index fund (AGG) had lit-tle change for the month, retaining its 6% re-turn for the year so far (interestingly, the in-vestment grade corporate bond index fund(LQD, not shown) reversed its prior month ex-traordinary gain of 2.5% and then some, and isnow even with AGG at about 6% for the year so far). U.S. Treasury bond rates also swung wildly, losing 20 b.p. earlier in the month, thenrecovering more than half that to close at justunder 2.1%. _____________________ (cont.)
 As you view this chart and on the following pages, note that I am now using exchange-traded funds (ETFs) rather than market indexes since indexes cannot beinvested in directly and the ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity.Prospectuses on these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.
 
Economic Outlook  While there is some evidence of green shoots, the eco-nomic environment remains weak. With the exceptionof a lot of activity surrounding the European debt crisis,little has changed since last month. Here are the factorsthat concern me the most (in no special order):
Housing: The Case/Shiller index of home pricesdropped 0.6% in the most recent report (for Septem-ber) and prices remain about 3.6% below year-ago lev-els. Small improvements have occurred in the num-ber of new and existing home sales, but not enough tobe meaningful.
Employment: November job data announced at thebeginning of December was 120,000 non-farm payroll
 jobs vs. 125,000 expected. Prior months’ figures were
revised upward from 80,000 to 100,000 for October and from 158,000 to 210,000 for September. The un-employment rate decreased from 9% to 8.6%. Thesefigures are certainly to be appreciated, but they arenot nearly the stuff of which a recovery is made.
European debt: This crisis was the driver of nearly allmarket action during November with off-again, on-again reports of crisis mitigation or resolution. In theend of the day, it does seem like we are getting closer to a plan to save the Euro, though any agreed plan willtake time to implement, if it survives at all. At stake isthe fate of the Euro and financial stability in the Euro-zone brought on by excessive and unsustainable sover-eign and bank debt. From what I can tell, there arefew avenues out of the debt predicament, alone or insome combination: achieve funding from the ECB and/or the IMF sufficient to support the debt and keep in-terest rates from creating a solvency crisis; decreasethe value of the debt through inflation (printingmoney, like QE) and/or restructuring; implement suffi-cient austerity measures to allow debtor nations paydown their debts; and/or grow economies faster thandebt growth. Unfortunately, for political and practicalreasons, none of these solutions represent a near termfix (if a fix at all) and the bond markets and ratingagencies are visibly reaching the end of their patience.That said, I think the political and investment commu-nity pressures are such that we will eventually inch for-
 ward to some sort of a positive outcome, but it won’t
happen overnight and may not happen soon.
American debt: November wasn’t a such a good
month for the U.S. either, as the so-called Super Com-mittee, charged with coming up with a plan by Thanks-giving to reduce the deficit over the next ten years, dis-banded without reaching an agreement. While this
may have contributed to some of the market’s decline
prior to Thanksgiving, the subsequent recovery(apparently a result of potentially positive news com-ing from Europe) tells me the market either is not allthat concerned about U.S. debt and deficit levels or be-lieves the problem will be handled soon, perhaps as anoutcome of the presidential election next year.
Political gridlock: Evidence continues to be absent for a break in the political gridlock in Washington. Far from it. And now we have to look forward to whether  Washington will be able to extend the payroll andother tax breaks into next year in order to help keepgrowth to at least a non-recessionary level.I have low expectations for the economic outlook over the next several years and will say more about this in myFearless Forecast for 2012 in January. Suffice it to say for 
Stock Market Commentary
Lane Asset Management
now that I expect slow but positive growth as the world continues to deal with its debt overhang.All bets are off if the Euro fails or war or a major terrorist attack hits somewhere in the world,heaven forbid.Investment Outlook If not shaken by an extraordinary event, the stock market moves with corporate earnings. In fact,earnings have been decent so far in 2011 but arenow looking like they will go out like a lamb in Q4.In fact, the sources for those earlier profits/EPSimprovements
 — 
workforce reductions, exports,foreign sales and stock buybacks
 — 
all look likethey are reaching the limit of their usefulness.On a purely technical basis,, while leaning positive,there is not a whole lot of support for great confi-dence in equities other than their relative per-
formance to bonds (see pg. 7). Therefore, I’m go-
ing to stick to nearly the same recommendationsmade last month (dropping bonds for now):
High quality, dividend paying common or pre-ferred domestic stocks
Broad market indexes such as the S&P 500, andespecially mid- and small-cap U.S. stocks
For sectors, regional banks, energy, consumer staples and utilities
For taxable accounts, municipal bond funds.Keep in mind that these recommendations arebased on a point in time and are subject to change with changing data. Investors need to be preparedfor continuing volatility.
 
SPY is an exchange-traded fund designed to match the experience of the S&P 500 index. Its prospectus can be found online. Past performance is no guarantee of future results.Page 3
Lane Asset Management
Since September 2010, the S&P has been unable to get out of the trading range of roughly 1125 to 1350(112.5 to 135 for SPY, the ETF that reflects the S&P 500). More recently, the S&P has been trading in therange of roughly 1125 to 1250/1275. Since the essence of technical analysis is to identify a trend or pat-tern that can be expected to perform in a reliably predictable way, what we have over the last 14 monthsis a range bound S&P, and an even more narrow range in the last 4 months. Since the moving averages arenot now showing a clear trend, my analysis for the S&P is that trading will remain in the narrow band of 1125 to 1275 until the market feels comfortable that the economic crisis
 — 
primarily the one in Europe
 — 
has been effec-tively addressed (a sustained breakout above 1275) or not (a sustained breakout below 1125).Accordingly, I advise caution in terms of any substantial commitment to owning equities along with an awareness of the volatility that hasbeen with us for the last 4 months and shows no sign yet of abating. For short term traders, I would consider adding risk as the S&P getscloser to the bottom of the range (1125) and shedding risk as it gets closer to the top (1275), which is not too far from where we are at todayat the beginning of December. For longer term traders, I would have cautious optimism on the basis of having a likely floor to the S&Paround 1125 along with the (hopefully effective) political pressure to resolve the European (and U.S.) debt crisis in coming months.
 
S&P 500

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