lfm commentary april 2010

8/9/2019 LFM Commentary April 2010

1/11

My regular readers know that about my oft

stated concern that the U.S. economy faces

stiff headwinds on account of high and per-

sistent unemployment, family wealth de-

struction, depressed wage growth, and tight

credit conditions and their impact on do-

mestic consumer spending (over two-thirds

of GDP). And, Im not the only one who

feels this way. Listen, for example, to

economists Nouriel Roubini and Joseph

Stiglitz, PIMCOs Bill Gross and Mohamed El

-Erians New Normal, and Gluskin Sheffs

economist David Rosenbergs Houdini Re-

covery. Yet, Ive been asked So, why does

the U.S. stock market keep going up?

While I caution against simple explanations

(including this one), I see three fundamental

areas that I believe are holding up the U.S.

market (for the time being):

Global government

stimulus spending

has to be given a

lot of credit for the

sudden reversal of

stock market behavior beginning a yea

ago and a continuing foundation since

then;

Substantial cost cutting, especially in em

ployment; and

Growth in emerging economies that

translates into profits for U.S. compan

(this is the most relevant factor for su

tained stock market improvement).

That said, I still rely on technical analysis fo

investing and trading decisions as I find tha

the most effective way to cut through the

mass of often conflicting information. Mor

on this in the following pages.

The New Normal?

Stock Market Commentary .. by Ed Lane

April 2010Lane Asset Management

Special points of interest:

Domestic and interna-

tional markets did well

in March and momen-

tum continues to look

favorable, though withincreased risk.

The employment pic-

ture continues to

brighten though unem-

ployment remains ex-

tremely high.

Other economic indica-

tors are generally unim-

pressive.

Inside this issue:

The New Normal? 1

At-a-Glance 2

Economic Recap 3

Market Recap 4-5

Momentum Watch 6-8

My Bottom Line 9

Disclosures 10-11


2/11

Page 2 Lane Asset Management

Here is a quick summary of this months

market commentary:

The Economy

While employment figures showed nice im-

provement, other indicators showed little.

Overall, we are still in a period of green

shoots.

The Market

March was a good month for the stock mar-

ket, recovering from the hiccup in January.

Market momentum remains positive but cau-

tiously so.

The Current Opportunities

My views from the last several months are

basically intact. I believe the eventual outper-

formance of the Asia/Pacific (ex. Japan) and

Latin American economies will prove that

these areas represent the best investment

opportunities for both equities and income-

oriented investments. Technology and cer-

tain areas of health care along with consis-

tent dividend-paying sectors (like utilities),

bank loan, and preferred stocks will also dowell.

My Bottom Line

Over the last twelve months, we have ex-

perienced PIMCOs new normal on ster-

oids. Even developed markets have done

well as the effects of government stimulus,

cost cutting and gains from operations in

Asia and emerging markets have boosted

returns. Its not clear how long this can las

but common sense tells us the pattern of

the last twelve months is unlikely to con-

tinue throughout 2010. Accordingly, de-

pending on ones tolerance for risk and

overall financial situation, continuing marke

exposure should be balanced and wary of

market potential reversals, especially in the

short run.

At-a-Glance

Democracy is a process

by which the people

are free to choose the

man who will get theblame.

Laurence J. Peter

The chart above shows Marchs total return from exchange-traded funds for, respectively,

the S&P 500, Europe, emerging markets, high yield bonds, Asia/Pacific (ex. Japan) and invest-

ment grade bonds.


3/11


Jobs and credit, the primary sources of a

consumer-led economy, are two of the best

bellwethers to watch if you want to see

where the economy is headed. DuringMarch, news continued on a positive track,

but key indicators remain far behind pre-

recession levels:

The BLS reported the unemployment

rate held steady at 9.7% while employ-

ment rose by 162,000 in the establish-

ment survey, over 75% of which was in

the private sector.

On the other hand, average hourly earn-

ings declined slightly, its f irst monthly

decline since 2003, producing the weak-

est annual year-over-year gain since early

-2004.

The Fed announced that consumer credit

increased by an annual rate of 2.4% in

January (5% for big ticket items). This is

the first increase since a year ago Janu-

ary.

Other economic news of interest includes:

The interest rate on 10-year Treasury

bonds rose sharply in the second half o

March to close the month at 3.84%,about a 25 basis point increase for the

month (and is hovering around 4% in

the first week of April). A sustained

upward movement in this rate would

signal concern about Fed tightening, a

depressant for housing and business ex

pansion.

According to the Institute of Supply

Management, the level of activity in the

factory sector grew at its fastest pace

since July 2004, boosted by inventories

Consumer spending rose an expected

amount. As there was no growth in

disposable income, the spending in-

crease derived from a decline in the sav

ings rate (now about half the rate of a

year ago May and possibly attributable

to the rise in the stock market).

On the international front, according toHaver Analytics, rapid recovery from

the recession in the emerging countries

of the Pacific Rim is putting pressure on

consumer and wholesale prices, notably

in India and China. This has resulted i

concern about slowed growth in those

regions as central banks respond to the

inflationary pressures.

Economic Recap

History will be kind to

me for I intend to write

it.

Sir Winston Churchill


4/11

In the charts below, we see the one- and

twelve-month performance of several ex-

change-traded and closed-end funds repre-

senting selected investment regions and sec-

tors.

As the March chart shows, all geo-

graphic regions did well during the

month, making up for the hiccup that

occurred in January and early February.

For the last twelve months, the devel-

oped markets in the U.S. and Europehave performed similarly and, as ex-

pected, below the performance for

emerging markets (EM) and Asia/Paciifc

ex Japan (AxJ).

Total return for high yield bonds has

been keeping pace with EM and AxJ as

risk premiums decline. As those premi-

ums begin to stabilize, this component of

total return will end.

Total return for investment grade bonds

has also benefited from the decline in

yields over the last twelve months. As

with high yield bonds, total returns will

be moderate going forward.

Market Recap


An investment in knowl-

edge always pays the

best interest.

Benjamin Franklin

A prospectus for the above funds can be obtained through this website:

http://moneycentral.msn.com/investor/research/etfs.aspx or from your financial advisor.


5/11

Looking at selected bellwethers represented

by ETFs in the 12 month and March charts,

the pattern is similar to that for the regions

and high yield bonds on the prior page.

Perhaps the most surprising result is the

continuing performance of the real estate

ETF over the last twelve months. An ex-

amination of this index shows that it is com-

prised of commercial and residential REITs

and organizations that hold and manage in-

come-producing properties (as opposed to

builders). It should also be noted that thisindex remains 30% below its value 3 years

ago (vs. 17% for the S&P). That said, with

stress in commercial and residential real

estate, performance of this sector has to be

a matter of concern for a potential correc-

tion.

Another result that will surprise some is

that gold is up only 20% in the last 12

months, having lost about 10% since the

beginning of the year. This recent decline is

counterintuitive given the often-discussed

anticipated weakness in the U.S. dollar, yet

may be explained by strengthening of the do

lar against the weaker currencies of other

developed economies, as shown below.

Market Recap (cont.)


The cure for boredom is

curiosity. There is no

cure for curiosity.

Dorothy Parker

A prospectus for the above funds can be obtained through this website:

http://moneycentral.msn.com/investor/research/etfs.aspx or from your financial advisor.


6/11

This section highlights various technical

measures of momentum. These measures

are not unique and vary depending on the

subject and time period. Past performance

should not be assumed to continue in the

future. That said, I use momentum indica-

tors to inform trading decisions and funda-

mental economic analysis to inform longer

term or secular views.

On the chart of the S&P 500 index on the

top of the next page:

Momentum, as measured by the 150-

day exponential moving average (EMA),

remains positive, thwarting a possible

inflection point occurring in the 75-day

EMA last month.

The MACD (another indicator used to

measure direction and strength of mo-

mentum) changed course at the begin-

ning of October, taking a distinctly nega-

tive turn. In February, the MACD began

to turn positive, but seems to be poten-

tially topping out in March.

The resistance line at 1000 was pierced

last August and now forms a support to

a potential correction. Ive placed my

next resistance line at 1200, near the

bottom end of the range of my 2010

year-end prediction of 1200-1300.

The second chart shows comparable infor-

mation for the MSCI Emerging Markets (EM)

index.

The 75day EMA turned decidedly

negative in February but reversed itself

again in March while the longer term 15

day EMA continues to hold on to an up-

ward trend.

The MACD, which has been weak since

November, is showing modest signs of

recovery.

The resistance line at around 950 contin

ues to hold well.

A firm conclusion cannot be reached on the

basis of these two charts. If anything, on ac-

count of the rapid advance in March com-bined with generally lackluster economic

news, I would say the risk is to the downside

and caution is advised, especially for short

term trading.

On page 8, longer term charts show a con-

tinuation of upward momentum for both the

S&P 500 and the EM index based on the EMA

but weakness is showing on the MACD.

While it should not be assumed that past pe

formance will be repeated, both the EMA an

the MACD have been reasonably reliable

over a long period of time.

Although not strictly a momentum indicator

the bottom chart on page 8 shows the per-

centage of S&P 500 stocks above their 150-

day moving average. Throughout the second

half of last year, the percentage was at his-

toric highsunsustainable based on prior

experience. While the pattern was broken

February, it has returned in March. Given th

downside risk I see in the other charts, the

level of this indicator is not exactly bullish an

the yellow flag is out.

Momentum Watch


Fundamental analysis

explains currency move-

ment in terms of macro-

economic variables suchas growth, inflation,

monetary policy, etc.

One of the weaknesses

of fundamental analysis is

that it says very little

about the timing of

moves and risk manage-

ment.

Timing is an important

part of risk management.

Even rudimentary techni-

cal analysis can help in-

vestors fine-tune their

entrance into an invest-

ment and help quantify

the risk. Monitoring the

price action itself will

likely reveal a higher

probability of successful

opportunities.

Journal of Indexes


7/11

Momentum Watch (cont.)

The S&P 500 and the MSCI Emerging Markets indexes are unmanaged indexes which cannot be invested into

directly. Past performance is no guarantee of future results.


Every man serves a

useful purpose: A

miser, for example,

makes a wonderfulancestor.

Laurence J. Peter


8/11

Momentum Watch (cont.)

The S&P 500 and MSCI EM are unmanaged indexes which cannot be invested into directly. Past performance is no

guarantee of future results.


Politics, n. Strife of

interests masquerad-

ing as a contest of

principles.

Ambrose Bierce


9/11

Is this the new normal contemplated by Mo-

hamed El-Erian of PIMCO in which we can look

forward to subdued growth in the developed

economies and more rapid advancement in the

emerging economies and, by implication, corre-

sponding results in the respective stock markets?

If so, based on the evidence over the last year or

so, heres what weve learned:

According to Wells Fargo Securities, the

2009 GDP growth rate was3.4% in the

developed economies (bolstered by +0.1% in

Korea) and +2.4% in the developing econo-

mies (dragged down by7.9% in Russia and6.5% in Mexico), and

Examining selected stock market indices for

the last 12 months below, emerging markets

and Asia/Pacific (excl. Japan) advanced by

about 65% each while the developed econo-

mies of the U.S. and Europe advanced about

40% and 45%, respectively.

Directionally, El-Erian has been rightso far.

But the stock market performance for the

advanced economies, while trailing the deve

oping economies, has not been too shabby,

either. And, despite the headwinds of pers

tently high unemployment and no real wage

growth, I suspect this can continue for a

while longer while businesses continue to h

down costs and take advantage of growth in

Asia and emerging markets by way of expor

and expanding business in those regions.

Eventually, the developed economies will ha

to face their greatly expanded public debt.

that point, all bets are off.

Thats the macro view, and I use it to inform

my longer term decisions and outlook. For

investing, however, I look to what the mark

are telling me through technical analysis. T

message remains positive but cautious. An

thats my advice to investors. Consider yo

own ability to react to market volatility and

your tolerance to it as investment decision

are made.

My Bottom Line


No animal should ever

jump up on the dining-

room furniture unless

absolutely certain that

he can hold his own in

the conversation.

Fran Lebowitz


10/11

Lane Asset Management is a Registered Investment Adviser 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 isin place.

Stock investing involves risk including loss of principal. Investing in international and

Emerging Markets may entail additional risks such as currency fluctuation and political in-

stability. 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 ad-

versely 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 risktaken in a portfolio should be commensurate with ones overall risk tolerance and financial

objectives.

Page 10Lane Asset Management

We've heard that a

million monkeys at a

million keyboards could

produce the complete

works of Shakespeare;

now, thanks to the

Internet, we know that

is not true.

Robert Wilensky

Disclosures

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.LaneFinancialManagement.com

[email protected]

Edward Lane

Lane Asset Management

P.O. Box 666

Stone Ridge, NY 12484

917-575-0299

Reprints and quotations are encouraged with attribution.
http://www.lanefinancialmanagement.com/http://www.lanefinancialmanagement.com/mailto:[email protected]:[email protected]:[email protected]://www.lanefinancialmanagement.com/


11/11

The charts and comments are only the authors view of market activity and arent recom-

mendations 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 importance in providing the

viewer a comprehensive summary of market conditions for the featured period. Chart an-notations 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 As-

set Management (LFM) considers to be reliable; however, LFM makes no representation as

to, or accepts any responsibility or liability for, the accuracy or completeness of the infor-

mation 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 and readers are urged to check with taxadvisors 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 based on hypothetical assumptions and is in-tended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE

FUTURE RESULTS.

Page 11Lane Asset Management

The nice part about

being a pessimist is that

you are constantly be-

ing either proven right

or pleasantly surprised.

George F. Will

Disclosures

lfm commentary april 2010

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