lfm commentary november 2009

8/14/2019 LFM Commentary November 2009

1/13

normal of lowered re-

turns, especially once

the current and tempo-rary impact of the

stimulus payments wear

off.

Meanwhile, Bill Miller of

Legg Mason Capital

Management points out

that back to 1871, there

has never been a 10-

year period of negative

stock performance that

wasnt followed by bet-

ter than average per-

formance for the next

ten years.

The question is, which is

reality? Is there any doubt

why the market is confused?

...to say the least. During

October, there were 22

trading days. On all but

five of them, the high-low

differential on the Dow

Jones Industrials index ex-

ceeded 100 points, or about

1%. On nine days, the

spread was over 150 points.

Thats huge. Despite a high-

low spread for the month of

about 6%, the index ended

the month just about where

it started.

Last month, I offered my

thoughts on what had been

driving the market since

March. But whats driving

the market now? I submit itis some combination of an-

ticipation of a technical cor-

rection/profit taking, reac-

tion to daily news items,

and reality setting in.

On the technical side, the

market has come so far, so

fast, that there is wide-

spread consensus that a

correction is due.

On the daily news side, in

just recent days, weve seen

evidence of a rebounding

economy with the GDP

scoring a 3.5% annualized

gain last quarter (the first

positive showing in a year)

and the next day weekly

unemployment claims

showed virtually no im-

provement, personal dispos-

able income slipped and

personal spending declined.

And the beat goes on.

The last pointreality

setting inis the critical

one, in my opinion. Just this

past week, two noted in-

vestment gurus offered dif-

fering points of view:

Bill Gross of PIMCO

discussed his view of

the fundamental changes

that have occurred in

the worlds economy

that will result in a new

Confusing...

Stock Market Commentary by Ed Lane

November 2009Lane Financia l Management

pecial points of interest:

A confused market

Green shoots continue,

but is this reality?

While momentum indi-

cators are still positive,

technical analysis sends

out warning signals

Investing opportunities

are limited. Caution is

advised.

Inside this issue:

Confusing...to say theeast

1

At-a-Glance 2

Economic Recap 3

Market Recap 4-5

Technical Analysis 6-8

Fund Highlight 9-11

My Bottom Line 12

Disclosures 13


2/13

Page 2 Lane F inancia l Management

Here is a one page summary of my market

commentary:

The Economy

The Great Recession may have techni-

cally ended with a 3.5% gain the GDP

achieved in the third quarter of this year

(although it is reported that almost all of

the gain came from stimulus and other

government spending, and a slowed pace

of inventory reductionhardly the stuff

of sustainable growth);

The Conference Board's Index of LeadingEconomic Indicators suggested pending

economic recovery with a 1.0% Septem-

ber increase that was the sixth consecu-

tive monthly rise;

A weak dollar, especially with regard to

emerging market economies, has bene-

fited the U.S. economy;

Meanwhile, earlier gains in consumer

confidence have flagged with the contin-

ued run-up in unemployment, flattening

of personal disposable income and de-

clines in personal spending;

As less than half the current stimulus

program dollars have been spent so far, I

expect the economy will enjoy artificial

support well into next year with a real

question mark thereafter.

The Market

The US stock market experienced a

roller-coaster ride in October, ending

the month just about where it began;

Emerging market debt and equity, true to

form of being more volatile than markets

of developed economies, suffered even

more during October, especially in the

last week;

Gold and oil/energy were among thevery few areas that did well in October

Momentum indicators would suggest

that the market still has legs, while ove

bought indicators strongly suggest a

pullback is in the cards. It may have ac-

tually started in October and perform-

ance in November will be most interes

ing to watch.

The Current Opportunities

The best longer-term equity opportuni

ties appear to be in emerging econo-

mies, technology, small cap stocks and

global basic materials;

Gold and emerging market debt con-

tinue to be appropriate hedges against

dollar weakness;

Domestic debt securities offer reason-

able returns with low volatility;

The sharp advance since March has

made many, if not most, markets vulne

able to a pullback. Caution and patienc

is advised.

Fund Highlight

This months focus is on the issue ofdollar weakness and several funds are

highlighted as potential hedge;

My Bottom Line

I am concerned about the U.S. economy

and, at least for the moment, cautiously op

timistic about the market.

At-a-Glance

If all economists were

laid end to end, they

would not reach a con-

clusion.

George Bernard

Shaw


3/13


There was good news:

The Conference Board's Index of Leading

Economic Indicators suggested pending

economic recovery with a 1.0% Septem-ber increase that was the sixth consecu-

tive monthly rise. The 5.7% increase dur-

ing those six months was the strongest

since early-1983 and the index itself was

at the highest level since October 2007;

The GDP advanced 3.5% in the third

quarter;

U.S. durable goods orders recoveredfollowing declines in the prior two

months.

...and some not so good:

While the advance in the GDP was en-

couraging on the surface, virtually all of

the gain came from non-sustainable

sources: stimulus and other government

spending and deceleration of the decline

in inventories;

Earlier gains in consumer confidence

have flagged with the continued run-up in

unemployment. The Conference Board

indicated that consumer confidence dur-

ing October fell 10.7% from September

(still nearly double last winters low);

While continuing dollar weakness adds

to the economic recovery, the longer

this trend continues, the more dangerous

it becomes as an impetus to rising inter-

est rates and inflation.

I could go on with the good news and that

which is less so, but Id rather talk briefly

about my longer term concerns. As a

Keynesian, I see the GDP made up of four

parts:

Consumer spending, which has previ-

ously contributed about 65-70% toGDP, seems unlikely to rebound as

wage growth is stymied and credit is

tight (among other reasons);

Government spending, which has ac-

counted for about 18-20% of GDP, is

likely to continue with stimulus spendin

continuing relatively high into 2011

though starting to decline mid-2010

(absent any new stimulus programs);

Investment spending, about 8-10% of

GDP, will likely be weak except for

technology and other cost-cutting ex-

penditures; and

Net exports, the balance, at about 5%.

Based on my research, I currently accept

the point of view that the domestic sources

of GDP growth may be constrained to un-

der 2%. If this turns out to be true, the im

plications for employment are bleak. And,

that turns out to be true, the political pres-

sure for more stimulus spending, especially

in an election year, will be hard to resist

further exacerbating federal budget deficits

Other than additional government spending

GDP gains will need to come from net ex-ports. As the U.S. is still the worlds larges

manufacturer, a declining dollar will facilitat

exports, not to mention boost reportable

profits by U.S. companies overseas opera-

tions. But there is the rub: how long and a

what pace can the dollar continue to slide,

and how will it end?

Economic Recap

To those critics whoare so pessimisticabout our economy,I say, "Don't be eco-nomic girlie men!"

Arnold Schwar-zenegger


4/13

In the chart below (as of the end of Octo-

ber), we see the year-to-date performance

of several exchange-traded and closed-end

funds representing selected investment ar-

eas of focus.

In June and August, there were relatively

short-lived corrections (profit-taking?) on

the continued advance upward. Another

decline was experienced starting in mid-

October. In the prior two occasions, the

correction, if it was one, was relatively short

-lived. It is impossible to tell now whether

the current correction will continue further

or not, but my belief is that risk remains on

the downside, whether that shows up this

time or later.

High yield corporate bond performance is

interesting. The return here has exceeded

most markets so far in 2009, and with less

volatility. Since this is a result of both actual

yield and price improvement on the bonds

as risk premiums subsided, it would be unre-

alistic to expect this kind of return going for-

ward. Having said that, I do expect some-

what better returns here than domestic equi-

ties for at least the next year (though default

levels will need to be carefully watched).

Market Recap


I don't make jokes. I just

watch the government

and report the facts.

Will Rogers

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

http://content.sharebuilder.com/MgdCon/Core/QuotesResearch/ETFProspectus/?cobrand=www


5/13

Looking at selected bellwethers in the chart

below (Ive replaced actual indexes with ex-

changed-traded funds that are intended toproduce comparable results), we see the

above average performance of technology

and basic materials. Gold has basically

matched the S&P 500 performance through

October (see the chart on the prior page)

although it has done so with considerably

less volatility. Financials and real estate have

had the strongest advance since March (but

they also had the steepest decline under thecurrent recession).

I must admit some surprise at the perform-

ance of the Consumer Discretionary sector,

though this may be explained by the boost

from the cash-for-clunkers, the credit forfirst-time homebuyers and other stimulus

programs.

Going forward, I would be concerned about

Financials as bank balance sheets are still

stressed, and commercial and residential

loans are not out of the woods yet.

All sectors are showing the same weakness

in October that the broader markets show

on the prior page. It remains to be seen

how the current correction will unfold.

Market Recap (cont.)


The surest sign that in-telligent life exists else-where in the universe isthat it has never tried to

contact us.

~Bill Watterson

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

http://content.sharebuilder.com/MgdCon/Core/QuotesResearch/ETFProspectus/?cobrand=www


6/13

Quoting from the Journal of Indexes regard-

ing investment in currencies but applicable

to other investments: Fundamental analysis

explains currency movement in terms of

macroeconomic variables such as 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 management.

Timing is an important part of risk manage-

ment. Even rudimentary technical analysis

can help investors fine-tune their entrance

into an investment and help quantify the

risk. Monitoring the price action itself will

likely reveal a higher probability of success-

ful opportunities.

I agree.

For the purpose of this months Commen-

tary, here is what I see in the chart of the

S&P 500 index on the top of the next page:

A very positive momentum signal as

price has broken through both the 75-

day exponential moving average* (75

EMA) and the 150 EMA

A positive signal as the 75 EMA has

crossed over the 150 EMA while the

150 EMA has an upward slope (although

the 75 EMA may be rolling over anegative sign)

The MACD* accurately showed an ex-

treme oversold situation last November

and again in March. In June, MACD

showed the beginnings of a market re-

versal but has been non-committal

(though slightly trending negative) since

then.

The second chart shows comparable infor-

mation for the MSCI Emerging Markets in-

dex. Notice the even more positive indica-

tions of the EMAs on this chart. On the

other hand, the 950 resistance line is still

intact.

On page 8, I show two charts illustrating the

performance of the S&P 500 index (in black)

compared to the percentage of stocks

within the index that are above their 150

and 200-day moving averages (in red), re-

spectively. Notice how the percentages

have now fallen below 90% in both charts

and, if past is prologue, can be expected to

fall further.

Thats the point we are at today and that is

a cautious signal indicating strong potential

for a correction of indeterminate size andduration (not to mention timing).

* I use an exponential moving average rather

than a simple moving average as the EMA

gives greater weight to recent values. The

MACD (moving average convergence diver-

gence) indicator is another favorite tool of

mine and is used to judge the direction and

momentum of a securitys price.

The selection of the specific indicators and

parameters in the technical analysis used

herein is subjective on my part and is not

intended as a specific recommended analysis

for the S&P 500 or any other investment.

Technical Analysis


I can't be out of money,

I still have checks left.

Anon.


7/13

Technical Analysis (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.


Its not hard to meet

expenses; they are

everywhere.

Anon.


8/13

Technical Analysis (cont.)

The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of

future results.


Help Wanted: Tele-

path. You know where

to apply.

Anon.


9/13

In this section, I normally highlight an ex-

change-traded (ETF) or closed-end fund

(CEF) that may be appropriate for certain

portfolios. This month, I will focus insteadon a specific investment issue and then tie

that back to specific fund ideas.

The issue I have in mind is U.S. dollar weak-

ness. While domestic inflation is currently

tame, dollar weakness inflates the cost of

imported goods (think oil and other foreign-

supplied commodities, for example) and may

eventually lead to higher domestic inflation.

I believe dollar weakness is in the cards over

the next two or three years (at least), espe-

cially with regard to emerging market cur-

rencies, for the following reasons:

A weak dollar is positive for domestic

employment as exports increase and

outsourcing decreases, thus policymak-

ers will be reluctant to make moves

(such as raising interest rates) thatwould strengthen the dollar;

With as much as half of profits gener-

ated by U.S. companies coming from

abroad, currency weakness leads to

more dollar profits being reported on

U.S. income statements;

A weak dollar draws foreign purchases

of domestic assets such as stocks andreal estate, boosting their value;

Low U.S. interest rates motivate traders

to engage in the carry trade where

they borrow in the U.S. and buy foreign

currencies and invest in foreign debt,

exacerbating currency value differen-

tials;

Emerging markets are recovering from

the global recession faster than devel-

oped economies and, by building do-

mestic demand (relying less on exportsto the U.S.), further strengthen local

currencies vis--vis the dollar.

Here are several funds that illustrate differ-

ent approaches for hedging against dollar

weakness:

State Street Global Advisors SPDR

Gold Shares (symbol: GLD). GLD is

intended to reflect the performance of

gold bullion.

Western Asset Emerging Markets Debt

Fund (ESD). ESD invests in both in-

vestment grade and non-investment

grade emerging market government

bonds with a current emphasis on Rus-

sia, Brazil and Mexico.

Templeton Global Income Fund

(GIM;). GIM also invests in emerging

market government debt, but is more

diversified than ESD and also invests in

the U.S. and other developed markets.

iShares Barclays TIP Bond (TIP). TIP

invests in U.S. inflation-protected Treas-

ury bonds and, therefore, is intended to

Fund Highlight


I expect to see the stockmarket a good dealhigher than it is todaywithin a few months.

- Pronouncement by

economist Irving Fisher

(1867-1947) in mid-Oct.

1929 as markets began a

-89% rout


10/13

reflect current and anticipated changes

in the CPI.

The PowerShares DB Index Dollar

Bearish Fund (UDN). This fund isdesigned to replicate the performance

of being short the US Dollar against the

following currencies: Euro, Japanese

Yen, British Pound, Canadian Dollar,

Swedish Krona and Swiss Franc (note

that these do not include emerging mar-

ket currencies).

Charts on the next page compare the per-

formance of these funds to a fund repre-

senting the S&P 500 (SPY) over 1- and 3-

year periods. I would note the following:

Over both periods shown, all the dollar

hedging funds outperformed the S&P

500;

Gold and the global/emerging market

income funds outperformed both TIP

and UDN, illustrating that, at least for

the period shown, dollar weakness

against emerging markets was greater

than both domestic and developed mar-

ket inflation; and

Gold and global/emerging market funds

showed much more volatility than the

TIP and UDN over the illustrated peri-

ods.

Please note that these funds have been selected

to represent their respective categories and are

not intended to be a selection of the best

within their category nor a recommendation for

investment.

Note also that that the past performance of

these funds can not be taken as an indication of

future performance. Indeed, the performance

and inherent volatility of these funds may make

them more susceptible to a market

correction. Such a correction may have actu-

ally begun in the last week of October or could

occur at any time. Investing in commodities

(like gold) and unhedged foreign markets should

be undertaken with care as they carry special

risks and typically greater volatility.

Fund Highlight


Further information about these funds can

be found at:

For ESD: http://www.leggmason.com/

IndividualInvestors/products/closed-end/

product_list.aspx

For GIM: https://

www.franklintempleton.com/retail/jsp_app/

home/ft_home.jsp

For GLD: http://www.statestreetspdrs.com

For SPY: http://statestreetspdrs.com/precise/market_cap#large+40

For TIP: http://us.ishares.com/product_info/

fund/overview/TIP.htm?qt=TIP

For UDN: http://

www.invescopowershares.com/products/

overview.aspx?ticker=UDN

An economist is a man

who states the obvious

in terms of the incom-

prehensible.

Alfred A. Knopf


11/13

Fund Highlight


People are living in a

pretend-and-extend en-vironment, waiting forthe economy to re-cover. (Referring to the

precarious state of thecommercial real estatemarket and the wave of

resets coming due be-tween 2011 and 2013.)

Robert J. Shiller, Ar-thur M. Okun Professorof Economics, Yale Uni-

versity


12/13

I am concerned about the U.S. economy

and, at least for the moment, cautiously op-

timistic about the market. Heres why:

I believe the domestic economy is morestabilizing than recovering. Following

what appeared to be the end of the world

as we know it a year ago October and again

last January-February, our government and

governments around the world poured tril-

lions of stimulus dollars into our respective

economies.

Focusing on the U.S. economy, stimulus pay-

ments into the states, cash-for-clunkers, first

-time home buyer credits, and extensions of

unemployment benefits seemed to put a

floor under consumer spending and job

losses.

As mentioned earlier, the third quarters

3.5% GDP gain came largely as a result of

stimulus payments and a deceleration in the

pace of inventory liquidation. With stimulus

payments scheduled to peak mid-2010 and

continue into 2011, absent a new stimulus

program or substantial cuts in taxes, roughly

3% of GDP growth could disappear.

The concern Ive expressed for a while is

where will sustainable new jobs come from?

Without jobs (and a relaxation in credit),

consumer spending will remain depressed.

Consumers may see this already. From TheConference Boards recent release on the

decline in consumer confidence:

Consumers' assessment of present-day

conditions has grown less favorable, with

labor market conditions playing a major role

in this grimmer assessment. In fact, the Pre-

sent Situation Index is now at its lowest

reading in 26 years. The short-term outlook

has also grown more negative, as a greater

proportion of consumers anticipate business

and labor market conditions will worsen in

the months ahead. Consumers also remain

quite pessimistic about their future earnings,

a sentiment that will likely constrain spend-

ing during the holidays."

And these are just some of my concerns

about the U.S. economy. The stock market,

on the other hand, is a different story be-

cause:

Technical indicators still show positive

momentum (barely so in some cases),

probably owing to a variety of green

shoots regardless of sustainability or

(lack of) substance behind them;

The stock market is much broader than

the U.S. economy and there are many

opportunities for diversification;

Continuing dollar weakness enhancescertain international markets as well as

reportable profits for U.S. companies

with overseas operations; and

Markets react more quickly than econo-

mies and to factors not directly related

to the economy, such as hordes of cash

seeking higher returns than T-bills and

the daily news cycle.

As these factors can change with very little

notice, caution is emphasized. Investors

should consider raising cash (or moving to

stronger areas) on a measured basis to both

protect against downside risk confronting

equities as well as to improve position when

the next buying opportunity presents itself.

My Bottom Line


Computers make very

fast, very accurate mis-

takes.

Anon.


13/13

Lane Financial 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

Financial Management and its representatives are properly licensed or exempted.

No advice may be rendered by Lane Financial Management unless a client service agree-ment is in 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 Financial 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 13Lane F inancia l Management

In the eyes of public

opinion, the contrarian

investor faces a lose-

lose proposition. When

contrarian approaches

fail to keep pace with

the current market

darling, more-

fashionable players

mock the out-of-step

thinker. When con-

trarian approaches sur-pass the alternatives,

consensus-oriented

players decry the irre-

sponsibility of the un-

conventional inves-

tor.

David Swenson,

Yale University Endow-

ment Fund Portfolio

Manager

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]

Lane Financial Management

P.O. Box 666

Stone Ridge, NY 12484

917-575-0299

Reprints and quotations are encouraged with attribution.
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lfm commentary november 2009

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