December 6, 2010

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Recap
November was a difficult month for the markets overall as the S&P 500 fell about 0.2%, the Emerging market index fell about 2.7% and the global bond index fell about 1.8%. After starting on a strong note, markets were challenged by a series of shocks, including:

Economic Outlook
The economic outlook for three principal regions — the U.S., Europe, and emerging markets — provide the backdrop for broad-based investment performance. In the U.S., headwinds consist of persistently high unemployment, the housing crisis, a looming state and local government budget crisis, and a lack of national political will to make the necessary changes in tax, spending and investment policies. Further deterioration in economic activity can be expected as pre-existing stimulus programs wind down. On the other hand, a weakened dollar, slowly improving manufacturing and nonmanufacturing indices and consumer confidence, and high hopes for a political settlement on extension of the Bush tax cuts and unemployment compensation (as of this writing) are among the factors giving positive lift to the markets. In Europe, the sovereign debt and bank credit crisis and the resulting policy actions will likely result in strong headwinds to economic growth for some time to come. In emerging markets, tailwinds of low sovereign debt and rapidly advancing GDP rates are periodically offset by fiscal tightening measures to combat rising inflation.
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nies are able to take advantage of foreign markets, especially in Latin America and Asia. Ultra low interest rates in the U.S. and large cash balances on balance sheets also enable companies to repurchase shares, thus boosting per share earnings at low cost. Emerging markets continue to outperform U.S. equities. That said, concerns about rising inflation in Brazil, China and elsewhere in EMs are resulting in policy actions to restrain economic growth. European stocks are under pressure as sovereign and bank debt problems are spreading and may be out of control. Gold, silver and other precious metals are likely to continue to perform well, though periodic profit-taking should be expected. I am turning cautious for investments in the income-oriented space as government bond yields move closer to lower bound and begin to reverse course. Better income-related opportunities can be found in global preferred stocks (though I would avoid those with a heavy concentration of financial institutions for the time being). The charts on the following pages provide selected technical analysis of these markets. As always, investments carry a degree of risk. Technical analysis, though not perfect, can be very helpful in the decision-making process by showing underlying trends irrespective of market commentary.

U.S. and emerging market equities have advanced decently this year while European markets have remained flat. Global recovery is underway, albeit slowly, with the highest growth occurring in emerging markets. Outlook remains cautious as the developed markets confront high unemployment and sovereign and bank credit difficulties while the emerging markets confront rising inflation. Gold (and certain other precious metals) are benefiting from currency devaluation and market/ geopolitical uncertainty. As always, I welcome your comments and suggestions. — Ed Lane

Ireland’s sovereign debt and bank crisis and concerns about the crisis spreading to Portugal, Spain, Italy and Belgium led to concerns about fiscal tightening in Europe and slowed economic growth, not to mention the potential for debt restructuring. The European bank crisis led to a weakening in the euro against the dollar which has (at least in the short term) a negative impact on U.S. stocks. North Korea’s attack on South Korea led to concerns about greater conflict in the Asian region. China’s increasing bank reserve requirements and the potential for additional tightening measures as a result of concerns about growing inflation resulted in dampening attitudes about China’s growth in the short term with a resulting negative impact on both equities and commodities. India uncovered a multi-billion dollar telecom licensing fraud that shocked its entire market.

Investment Outlook
I see the investment outlook as follows:

For the year, the U.S., emerging market and bond indexes are up nearly 6%, 9% and 7%, respectively, through November.

For U.S. equities, the investment picture is not as bleak as the economy since domestic compa-

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 experienced a hiccup in November at its current line of resistance, but bounced back in the first few days of December. On a technical basis, the 75– and 150-day moving averages remain positive although the MACD (another moving average-based momentum indicator) turned negative during the month. The index is now hovering around its technical resistance at about 1200 which gives some reason for caution (even though we know the first few days of December were very positive). At this point, giving due regard to

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the economic headwinds in the U.S. and other developed economies, but also keeping in mind the stronger, but possibly overheating, economies in the emerging markets, it is premature to get overly excited about the sustainability of the current uptrend in the S&P 500. The caution light is out and any additional exposure to U.S. equities should be entered into slowly and carefully with the understanding that a pullback of 10-20% or so would be consistent with the pattern established over the last 12 months.

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
The MSCI Emerging Market Index had a setback in November as a result of concerns of overheating economies and government policy actions to control rising inflation. (The setback exceeded that of the S&P 500 but, then again, so did the preceding advance.) The 75– and 150-day moving averages are flattening from their previous upward slope, especially the shorter-term 75-day average. The MACD, a shorter term indicator, began to weaken in mid-October and showed greater weakness in November. A very positive sign is the reten-

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tion of the breakout above the a new support line at 1050. While the first few days of December reversed some of November’s losses, additional follow-through will be necessary to have full confidence the bull market can continue. Given the generally positive fundamental outlook, this may be an opportunity to “buy on the dip” for more aggressive investors. Others may want to wait a bit to see if the early December rebound can continue. At this moment in time, I suggest investors be cautious of the “risk-on” trade in emerging 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
Dow Jones Asia/Pacific South Asia Index

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The Dow Jones Asia/Pacific South Asia Index differs from the MSCI Emerging Markets Index on the preceding page by focusing on the countries of South Asia (e.g., India, Singapore, Malaysia, Indonesia,Thailand, and Vietnam, among others) and excluding China and countries in Latin America, Eastern Europe, and the rest of Asia. While the chart below is very similar to the one for emerging markets, it clearly shows a more aggressive upward tilt. On a technical basis, the 75– and 150-day moving averages continue to show positive momentum. On the other hand, as with emerging markets, the MACD is showing short term weakness that may be nothing more than a pause as occurred in August when the price level reached a line of resistance. While investments in emerging markets generally, and South Asia specifically, can be highly volatile and should be managed carefully, the above average growth in the South Asian economies and positive technical outlook make such investments appropriate for the equity portion of one’s portfolio.

The Dow Jones South Asia 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

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The Barclays Capital Global Bond Index represents the returns 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 has been a beneficiary of declining interest rates and decline in the value of the dollar, producing capital gains. With the expectation that interest rates will be rising in the future, that component of the total returns in this index will be harder to reproduce. On the other hand, there are other components of total return including higher interest rates abroad and currency movement. For the portion of a portfolio where capital preservation has a high degree of importance and also to provide diversification, while at the same time outperforming CDs and similar instruments, I give a green light to a mix of global fixed income investments with a focus on emerging market debt. That said, sovereign and bank debt problems in Ireland and elsewhere in Europe that came into prominence again in November took a small toll on the index and may give pause to additional investments until the dust clears.

The Barclays Capital Bond—Global 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 an 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 an alternative to fiat currency. 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 that’s 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 as suspected by some today, the value of the metals can be quite volatile and can contract rapidly. An interruption in the pace of price advances should not come as a surprise. Therefore, caution is advised when investing in precious metals.

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
Year-to-Date Index Comparisons
The chart below shows the year-to-date performance of selected indexes. Several observations can be made:
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A high degree of correlation can be seen among the equity markets. As expected, performance of the S&P 500 has lagged emerging markets this year. European equities lagged all markets. While performing the best of equity markets in the period shown, the emerging markets, especially South Asia, have also shown the highest degree of volatility. Global bonds have turned in a highly respectable performance with low volatility but incremental improvement is evaporating. Gold has done extremely well with cumulative return for 2010 greater than the broad equity markets shown with less volatility.

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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 one’s overall risk tolerance and financial objectives. The charts and comments are only the author’s view of market activity and aren’t 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 aren’t predictive of any future market action rather they only demonstrate the author’s 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

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