April 10, 2012

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Economic and Market Recap March was another good month for U.S. equities, though less so for all the other market segments tracked in the chart below. On the some ground following a very strong prior 3 months. In Europe, the picture wasnt so rosy with German retail sales and trade trends lowering. European Monetary Union Purchasing Manager Indexes posted lower values and remained contractionary. The EZ outlook remains depressed as sovereign debt issues remain and austerity budgets portend recession. Following a fast start for the year, emerging markets let off steam in the wake of news of Chinas slowing economy (relative speaking, of course). Gold continues to languish as the dollar strengthens and expectations for further QE (money printing to some) from the Fed declined in March. Oil gave up ground with the strengthening of the dollar and, perhaps surprising to some, is barely up this year. Not shown is the spot price of unleaded gasoline which, more in line with peoples experience and expectations, has risen over 25% so far this year. Investment Outlook While the U.S. equity market continued to roll forward in March, I remain skeptical of its ability to continue to do so (cont. on the next page)

Last month I described the role of expanded central bank balance sheets in providing buoyancy to stock prices. By one recent report, central banks in the U.S., the U.K., Europe and Japan have added $9 trillion (thats trillion with a T) to their balance sheets. I also mentioned the unknown impact once those balance sheets start to get unwound. Well, we got a taste of what might happen last week when Ben Bernanke suggested that further accommodation may not be forthcoming as the economy appeared to be steadily improving. On the heels of that announcement, the S&P fell about 1.5%. So, has the punchbowl been taken away? If a strengthening economy were the only criteria, Id say not yet since I believe we still have a long way to go before a growing economy is selfsustaining. As Yogi Berra said, the future aint what it used to be.

U.S. economic front, March saw jobless claims remain below 400,000 reaching a 4-year low while non-farm payroll increases remained above 200,000 (a pattern we now know ended in April). U.S. Leading Economic Indicators reported by The Conference Board posted a slightly better than expected increase and the FOMC gave positive signals regarding the steady improvement in the economy. As equities remained strong, corporate bonds gave up

As you view this chart and on the following pages, note that I am using exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested 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.

L a n e A s s e t M a n age m e n t
Stock Market Commentary
(and not just because of the slippage in early April). I discuss my concerns in The Big Picture section below. Accordingly, I prefer to remain conservative for now by focusing on the following investments (no change from last month):

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economy to have low growth or even go into recession while the stock market achieves a higher return as a result of rising profits, especially if they exceed expectations. Therefore, my downbeat comments about the global economy to follow are not meant to suggest that I am equally downbeat about investing which I am not. Since money always finds a home, there will remain places to profitably invest, at least in relative terms. The number one issue for the global economy is the overhang of sovereign debt and the fiscal and monetary actions that have been implemented so far to deal with the problem. Debt per se is not a bad thing as long as the ability to service the debt grows faster than the debt itself. While the rest of the world, especially the U.S., has many more options than did Greece, Greece does illustrate one of the main avenues for dealing with too much debt, namely, repudiation. But it also seems about to illustrate another phenomenon, social unrest in the face of severe austerity. Iceland (and in earlier years, parts of Latin In America) illustrated another approach for dealing with too much sovereign debt: devaluation (an option only available if you have your own currency). The outcome of that policy was also difficult on Icelanders as imports became that much more expensive. Yet, Iceland survived, even more than survived, by the increase in exports and tourism made possible by the heavily devalued currency. The main folks disadvantaged were those whose debts were repaid with the devalued currency.

Right now, concerns are rising about the debt exposure in Spain and Portugal, both of whom dont have the Icelandic devaluation option and both of whom will have a greater impact on the European economy should they follow the Greek example. Some feel that Italy is not far behind. And then theres the U.S., the U.K., and Japan. So far, central banks have been attempting to deal with the problem by flooding the system with upwards of $9 trillion through quantitative easing. This may have, indeed, contributed to keeping equity prices from collapsing, though I suspect the ability for corporations to lower their own debt exposure and maintain profitability played an even more important role. But the option of QE is reaching the end of its political viability and the hope of its buying time until economic growth becomes more self-sustaining is fading. QE has also created its own concerns as ultimate withdrawal could turn out to be painful. I believe politicians are of good will, but polarization has made a difficult problem seemingly impossible. In the U.S., we will soon be finding out whose economic message resonates the strongest. But that will only be the basis for a new beginning. No matter who wins, whats really needed, in my humble opinion, is something weve seen too little evidence of a willingness to compromise on the role of government while also accepting the need for shared sacrifice and greater investment in our future. This, too, shall pass. Lets hope it does so with as little pain as possible and smart long term decisions.

High quality, dividend paying common or preferred domestic stocks Broad market indexes such as the S&P 500 For sectors, regional banks, technology, energy, consumer staples and utilities Investment-grade corporate bonds For taxable accounts, municipal bonds.

Keep in mind that these recommendations are based on a point in time and are subject to change with changing data. Investors need to be prepared for continuing volatility. The Big Picture I have serious concerns about the global economy in the years ahead. Before laying out my case, however, I need to point out that the economy and the stock market, while related, are not exactly the same thing. Generally speaking, the economy, as measured by the Gross Domestic Product, reflects the sum of expenditures made by individuals, businesses and government. Think of it as the total expenditures (equals revenue) of the nation. The stock market, on the other hand, is a reflection of the profitability of businesses. Therefore, it is quite possible for the

L a n e A s s e t M a n age m e n t
S&P 500
Since October 2010, the S&P 500 had been unable to get out of the trading range of roughly 1125 to 1350 (112.5 to 135 for SPY). In February, the pattern was broken as SPY exceeded its resistance at 135, retested the level in early March and has now decisively established itself above 135 which has become a new line of support. On one hand, the March performance was a continuation of a trend that has been in place since last December. Typically, the longer trends persist, the higher the probability of continuation although interim corrections are to be expected. On the other hand, there is little macroeconomic funda-

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mental support for the pace of change that has been going on for the last 5 months. Indeed, compared to both international equities and investment grade corporate bonds, the S&P is the only major index of those followed here to have advanced during March. As the month came to a close, SPY appeared to be losing momentum. We now know that Bernankes comments, the weak Spanish bond auction in the first week of April and the worse-than-expected jobs report last Friday appear to be causing the index to reverse course. Whether this was anticipated by the loss of technical momentum is anyones guess, but the weakness was certainly there. As things stand today, we still have positive momentum in the moving averages but awareness of challenging economic headwinds. While Im not ready to pull the plug on SPY at this moment, nor would I add to exposure. The pattern of the last two years of a strong first quarter followed by a significant sell-off leads me to recommend caution for the coming period.

SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. 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
All-world (ex U.S.)
For the entire two-year period shown, the Vanguard All-world index ETF, VEU, has traded in the range of 38-50 while having little net change over this timeframe. More recently, VEU appeared to be more narrowly range bound between 38 and 43. In February,VEU broke through the resistance at 43 only to retest that barrier twice in March, almost surely as a result of the uncertainty surrounding the European debt crisis this time with a weak Spanish bond auction and rising Spanish bond yields. Such retests are not that uncommon, but a failure to bounce back would not be a good sign.

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From a technical perspective (including the relative performance chart on the next page), theres little to be said in favor of pursuing the broad international index at this point. While, as with SPY, Im not quite ready to step away from VEU, Im much closer to that point of view. Should VEU drop in price to the range of $42 to $42.50 (a decrease of nearly 7% from its most recent high), that would lead me to recommending a reduction in exposure for all but the longest term commitments. Those with less risk tolerance might consider reducing exposure earlier.

VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. 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
Asset Allocation and Relative Performance
Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. Commonly, investors

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choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually or when the actual percentage allocation deviates from the longer-term strategic plan. One useful tool Ive found for establishing and revising asset allocation comes from observing the relative performance of major asset sectors (and within sectors, as well). The charts below show the relative performance of the S&P 500 (using the exchange-traded fund SPY) to an investment grade corporate bond index (using LQD) on the left, and SPY to a Vanguard all-world (ex U.S.) index (using VEU) on the right. On the left, the S&P 500 began outperforming bonds in October and had an especially strong month in March. Despite this performance, I am still inclined to remain at or below a strategic (long term) equity allocation for the foreseeable future on account of the larger macroeconomic issues and resulting market uncertainty. On the right, the momentum that appeared to be shifting in favor of international equities earlier in the year, sharply reversed course in March, wiping out the relative advantage gained in the prior two months. My recommendation to increase international exposure last month was, at best, premature, and I would limit that exposure today while Europe continues to address its debt issues.

SPY, VEU, and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends), the FTSE All-world (ex US) index, and the iBoxx Investment Grade Corporate Bond Index, respectively. Their prospectuses can be found online. 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
U.S. Aggregate and Corporate Bonds

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LQD represents the total return (capital gains and interest income) for investment grade corporate bonds; AGG represents the total return of a composite of domestic government and investment grade corporate bonds and similar instruments (similar to LQD but with government bonds). Note the dip followed by flatness in LQD in late 2010/early 2011. This corresponds to a brief increase in interest rates at the time. The same pattern occurred again last November and again in March. On the right, we see the relative performance of LQD to AGG which, except for brief periods, has been to the good for most of the last two years. From a technical perspective, its hard not to like investment grade corporate bonds. Not only has the last two years been extraordinary, but this performance goes back to the early 80s when interest rates were at their highest. Yes, certainly a large part of the past performance can be attributed to the decline in interest rates and this is a phenomenon with a limited future, we can all agree. But with the index holding bonds of various durations, the impact of rising rates (if occurring slowly) is likely to be more muted than many people might expect. Last month I was concerned about the extent to which LQD had gotten above its trend line. That problem was eliminated in March. As things stand today, some caution is warranted on the basis of the declining MACD indicator. That said, I remain comfortable with investment grade bonds as a long term investment so long as interest rates dont increase too rapidly.

AGG is an exchange-traded fund (ETF) designed to match the experience of the Barclays Capital U.S. Aggregate Bond Index. LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. Past

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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 Stone Ridge, NY Reprints and quotations are encouraged with attribution.