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Lane Asset Management Stock Market Commentary April 2012

Lane Asset Management Stock Market Commentary April 2012

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Published by Edward C Lane
Economic and stock market commentary for April 2012
Economic and stock market commentary for April 2012

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Categories:Business/Law, Finance
Published by: Edward C Lane on Apr 11, 2012
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Economic and Market RecapMarch was another good month for U.S. equi-ties, though less so for all the other marketsegments tracked in the chart below. On theU.S. economic front, March saw jobless claimsremain below 400,000 reaching a 4-year low while non-farm payroll increases remainedabove 200,000 (a pattern we now know endedin April). U.S. Leading Economic Indicatorsreported by The Conference Board posted aslightly better than expected increase and theFOMC gave positive signals regarding thesteady improvement in the economy. As equi-ties remained strong, corporate bonds gave up
some ground following a very strong prior 3months.
In Europe, the picture wasn’t so rosy with Ger-
man retail sales and trade trends lowering.European Monetary Union Purchasing Man-ager Indexes posted lower values and re-mained contractionary. The EZ outlook re-mains depressed as sovereign debt issues re-main and austerity budgets portend recession.Following a fast start for the year, emergingmarkets let off steam in the wake of news of 
China’s slowing economy (relative speaking, of 
course).Gold continues to languish as the dollar 
Stock Market Commentary
April 10, 2012
Lane Asset Management
Last month I described therole of expanded centralbank balance sheets in pro-viding buoyancy to stock prices. By one recent report,central banks in the U.S., theU.K., Europe and Japan have
added $9 trillion (that’s tril-lion with a “T”) to their bal-
ance sheets. I also men-tioned the unknown impactonce those balance sheetsstart to get unwound. Well, we got a taste of what mighthappen last week when BenBernanke suggested that fur-ther accommodation maynot be forthcoming as theeconomy appeared to besteadily improving. On theheels of that announcement,the S&P fell about 1.5%.So, has the punchbowl beentaken away? If a strengthen-ing economy were the only
criteria, I’d say “not yet”
since I believe we still have along way to go before a grow-ing economy is self-sustaining. As Yogi Berra
said, the future ain’t what it
used to be.
strengthens and expectations for further QE
(“money printing” to some) from the Fed de-
clined in March.Oil gave up ground with the strengthening of thedollar and, perhaps surprising to some, is barelyup this year. Not shown is the spot price of unleaded gasoline which, more in line with peo-
ple’s experience and expectations, has risen over 
25% so far this year.Investment Outlook  While the U.S. equity market continued to rollforward in March, I remain skeptical of its abilityto continue to do so (cont. on the next page)
 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 in-vested 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.
Right now, concerns are rising about the debt expo-
sure in Spain and Portugal, both of whom don’t have
the Icelandic devaluation option and both of whom will have a greater impact on the European econ-omy should they follow the Greek example. Some
feel that Italy is not far behind. And then there’s 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 up-
 wards of $9 trillion through “quantitative easing.”
This may have, indeed, contributed to keeping eq-uity prices from collapsing, though I suspect the abil-ity for corporations to lower their own debt expo-sure and maintain profitability played an even moreimportant role.But the option of QE is reaching the end of its politi-
cal viability and the hope of its “buying time” until
economic growth becomes more self-sustaining isfading. QE has also created its own concerns as ulti-mate withdrawal could turn out to be painful.I believe politicians are of good will, but polarizationhas made a difficult problem seemingly impossible.In the U.S., we will soon be finding out whose eco-nomic message resonates the strongest. But that will only be the basis for a new beginning. No mat-
ter who wins, what’s really needed, in my humbleopinion, is something we’ve seen too little evidence
a willingness to compromise on the role of gov-ernment while also accepting the need for sharedsacrifice and greater investment in our future.
This, too, shall pass. Let’s hope it does so with as lit-
tle pain as possible and smart long term decisions.(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 nowby focusing on the following investments (no changefrom last month):
High quality, dividend paying common or pre-ferred 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 basedon a point in time and are subject to change withchanging data. Investors need to be prepared for continuing volatility.The Big PictureI have serious concerns about the global economy inthe years ahead. Before laying out my case, how-ever, I need to point out that the economy and thestock market, while related, are not exactly thesame thing.Generally speaking, the economy, as measured bythe Gross Domestic Product, reflects the sum of ex-penditures made by individuals, businesses and gov-ernment. Think of it as the total expenditures(equals revenue) of the nation. The stock market,on the other hand, is a reflection of the profitabilityof businesses. Therefore, it is quite possible for the
Stock Market Commentary
Lane Asset Management
economy to have low growth or even go into reces-sion while the stock market achieves a higher returnas a result of rising profits, especially if they exceedexpectations. Therefore, my downbeat commentsabout the global economy to follow are not meant tosuggest that I am equally downbeat about investing
which I am not. Since money always finds ahome, there will remain places to profitably invest,at least in relative terms.The number one issue for the global economy is theoverhang of sovereign debt and the fiscal and mone-tary actions that have been implemented so far todeal with the problem. Debt per se is not a badthing as long as the ability to service the debt growsfaster than the debt itself. While the rest of the world, especially the U.S., hasmany more options than did Greece, Greece doesillustrate one of the main avenues for dealing withtoo much debt, namely, repudiation. But it alsoseems about to illustrate another phenomenon, so-cial unrest in the face of severe austerity.Iceland (and in earlier years, parts of Latin In Amer-ica) illustrated another approach for dealing with toomuch sovereign debt: devaluation (an option onlyavailable if you have your own currency). The out-come of that policy was also difficult on Icelanders asimports became that much more expensive. Yet,Iceland survived, even more than survived, by the in-crease in exports and tourism made possible by theheavily devalued currency. The main folks disadvan-taged were those whose debts were repaid with thedevalued currency.
Page 2
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 noguarantee of future results.Page 3
Lane Asset Management
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, re-tested the level in early March and has now decisively established itself above 135 which has become anew line of support. On one hand, the March performance was a continuation of a trend that has been inplace since last December. Typically, the longer trends persist, the higher the probability of continuationalthough interim corrections are to be expected. On the other hand, there is little macroeconomic funda-mental support for the pace of change that has been going on for the last 5 months. Indeed, compared to both international equities and in-vestment 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 Bernanke’s comments, the weak Spanish bond auction in the f 
irst 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 anyone’s guess, but the weakness was certainly there. As things stand today, we still
have positive mo-
mentum in the moving averages but awareness of challenging economic headwinds. While I’m not ready to “pull the plug” on SPY
at this mo-ment, 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 rec-ommend caution for the coming period.
S&P 500

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