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Lane Asset Management Stock Market Commentary June 2012

Lane Asset Management Stock Market Commentary June 2012

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Published by Edward C Lane
Economic and stock market analysis for June 2012
Economic and stock market analysis for June 2012

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Published by: Edward C Lane on Jun 08, 2012
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Economic and Market RecapIn May, equities suffered their worst monthlyloss in two years. The month opened up with weaker than expected employment numbersin the U.S. and was followed by a constantstream of negative news about the Europeandebt situation (increasingly strong indicationsof a Greek default and departure from theEMU, record unemployment in the EZ withhalf the countries there entering recession, andpotential failures of Spanish banks).Although this report is intended to be primar-ily about the month just ended, so much hashappened at the beginning of June that I wouldbe remiss not to bring it to your attention.
 
 June started off on Friday, June 1st, with amuch worse than expected employment re-port in the U.S. along with increasing concernabout rising yields in Spain and Italy. Whilethe following Monday exposed weakness inU.S. factory orders, there were hints that Ger-many may soften its stand against Eurozonebonds that would be used to socialize Euro-pean debt and relieve pressure.Tuesday brought more potential good news with a growing prospect for coordinated globalpolicy action to forestall further economicslowdown. Wednesday was a red letter day with several Fed board members hinting atfurther easing in the U.S. helping the S&P gainover 2.5% (a technical bounce reacting to prior 
Stock Market Commentary
May 7, 2012
Lane Asset Management
The news of the momentis the growing anticipationof further policy action inthe U.S. and Europe toprovide a backstop to theeconomies and to protectthe European banks frominsolvency. While I findsupporting these actionseasy considering the alter-native, it needs to be re-membered that these areartificial means to addressa far more serious prob-lem and sow their ownseeds for future difficul-ties. The European andU.S. economies of roughly1990-2008 were built onsand (debt). Restorationof broad participation in athriving economy will re-quire much more funda-mental changes than canbe offered by centralbanks around the world.loss may have also played a part in the rally).Thursday started strong but ended essentially flat.Investment Outlook In terms of short term performance:
Markets are concerned about a global slow-
down/recession and each day’s news that rein-
forces that view is met with further market de-terioration
 While there is political concern about the po-tential long term expansion of sovereign debt,the markets are overjoyed to hear of govern-ment action to bolster economic growth andavoid bank failures (when the chips are down, we all become Keynesians)
The back-and-forth of these messages are con-tributing to market volatility and the bi-modalnature of expected investment returns.I believe we are at one of those investment cross-roads where almost overwhelming fundamental
headwinds are meeting the world’s best attempts
at reversing the global economic slide. Frankly, upto now, policy actions have been short-lived and in-adequate to the task.How an investor responds to the current environ-
ment depends on one’s risk tolerance and invest-
ment time horizon. My own view at the moment isthat the downside risks outweigh the upside oppor-tunity for at least this year, so invest accordingly.
The charts on this and the following pages use exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly. The ETFsare chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses for these ETFs canbe found with an internet search on their symbol. Past performance is no guarantee of future results.
 
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 2
Lane Asset Management
Last month I observed that the pattern of price performance over the last couple of months was lookingsuspiciously like that in each of the two prior Springs. Even more telling, it seemed to me, was the rever-
sal of trend that began in April along with the “wealth” of downside fundamental risk factors (sovereign
debt, high unemployment, and political gridlock) that overhung the market. Accordingly, I advised notadding additional exposure to equities. That turned out to be the right call at that point in time. I also ad-
vised being attentive to additional deterioration in the market that might trigger the need to lower one’s
risk profile. Now that we experienced that deterioration, what should be done now? From a technical perspective alone, using data as of the
end of May, I would have to say it would be prudent to lower one’s exposure to equities at this point.
On the other hand, two factors argue for some patience. First, there is the very sharp decline in May, the worst month in two years, that begsfor a corrective bounce. Second, pressure is growing for central bank and government action to address the broader European debt crisis, es-pecially in Spain (the potential next shoe to drop). Both these factors seemed to come into play on June 6th when the S&P gained over 2.5%.At this point in time, while the technical outlook is negative, I suggest the SOH (sit on hands) approach until we have more technical confir-mation on market direction (which may come at any minute given pressures for policy action in Europe and the U.S.)
S&P 500
 
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 futureresults.Page 3
Lane Asset Management
Last month, I advised minimizing exposure to international equities on the basis of likely deteriorationand turmoil in international equities owing largely to European debt issues and strong relative underper-formance relative to U.S. equities, as well as the flashing red signal in the technical analysis. While the ex-act timing of the international decline could not have been predicted precisely, the advice was timely.As we sit today, little has changed in the European debt crisis despite early June discussions of potentialsupport for Euro bonds and a bailout of Spanish banks. Fundamentally, with respect to its sovereign andbank debts, Europe can kick the can down the road by bringing more liquidity into the system and/or allow some degree of debt restructuring
causing bondholders to take a haircut (however unlikely that is). With record unemployment and debt, Europe’s financial pict
ure is not likely toimprove for some time to come.From a technical perspective, the chart shows the index reaching a level of support around 35 at the end of May. On three prior occasions, VEUheld at this level and we know now that the index bounced strongly on June 6th as the promise of European policy action met an extreme shortterm oversold market. At this stage, I would be reluctant to increase exposure to most international equities without additional confirmation of 
this price support. That said, on an historical basis, I can’t rule out that this isn’t a decent entry point for more aggres
sive investors.
All-world (ex U.S.)

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