May 4, 2013

Economic and Market Recap While April was the most volatile month so far this year, the S&P 500 (with reinvested dividends) is up nearly 14% through the end of last week. This exceeds the entire years expectations of virtually all major forecasters I studied at the beginning of the year. Almost no one I study today believes this pace can continue without a significant (5-10%) correction before the year is out. On the other hand, many analysts at the beginning of the year were pointing to a stronger second half compared to the first. My advice for equity investments at this stage is to monitor risk exposure and choose sectors carefully with an emphasis on those with the least vulnerability to sudden market shifts.

L a n e A s s e t M a n age m e n t
Stock Market Commentary
enough, the first week was rough. Then things turned around briefly with a report of a record number of job openings, improvement in jobless claims and improvement in the OECDs leading economic indicators, only to swing negative again with weakness in the homebuilders index and disappointing earnings reports from IBM and eBay. Dizzy yet? The U.S. market finally found its footing for the month with better-than-expected earnings reports (about 70% of reporting companies beating expectations) and strength in a variety of economic reports. The market weakened at the end of April with ADPs lower than-expected payroll numbers but bounced back quickly in the first few days of May when the BLS reported much higher-than-expected employment, positive revisions for February and March, and a tick downward in the unemployment rate to 7.5%. Europe tagged along with the S&P until Mario Draghi, head of the ECB, reiterated his defense of the Euro, following up with a lowering of the benchmark rate at the beginning of May. Keep in mind that the EZ is still in negative territory when looked at over 2 years, well behind the U.S. Gold took a swan dive mid-April, but has since recovered about half its earlier loss. Investment Outlook
As the economic headwinds have not subsided, green shoots in the U.S. notwithstanding, and technical momentum appearing ready to shift, I continue to think the prudent thing to do is keep risk exposure below ones long term strategic allocation:

When this month began, I thought my (and other) forecasts for a market correction were about to come true. After all, the month started with David Stockman (Reagans OMB Director) predicting a market crash, ADP reporting lower than expected payrolls, nonfarm payrolls actually coming in well below expectations, the Institute of Supply Management (ISM) nonmanufacturing index falling sharply, and other indications of economic weakness not to mention the technical signals of impending equity reversal. Sure

Lessen exposure to international sectors Increase exposure to safer, stronger U.S. sectors like consumer goods, utilities and health care Increase exposure to strong dividend payers Increase exposure to broadened, multi-sector

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 ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses for these ETFs can be found with an internet search on their symbol. 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
S&P 500
Over the last couple of months, Ive been observing the pattern of trend and momentum for SPY and relating that to the very similar pattern that occurred in the first quarter of last year with the thought that a correction was imminent. While that could still turn out to be true, now Im wondering whether the current pattern is more closely related to the Fall of 2010 where upward trend persisted for a more comparable 6 months while momentum stagnated. Since were a little over 5 months into the current trend, looking

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strictly at the technical indicators, I suspect the current pace wont go on much longer. If we factor in the economic woes of Europe and the weakening trend in corporate revenues (as opposed to earnings), a correction may be only weeks or a few months away. And, judging by the shape of the reversal that took place last May and March 2010 (not to mention August 2011), the correction could be both sudden and sharp. Accordingly, rather than trying to squeeze out the last drop of gain, I suggest taking some risk off the table and paying even closer attention to those few sectors offering high quality and strong relative performance.

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 no guarantee of future results.

L a n e A s s e t M a n age m e n t
All-world (ex U.S.)
International equities, represented here by VEU, have made a clean break above the resistance at $47 and are very close to VEUs highest level since July 2008. There is strength in the trend, despite its short length, and the beginnings of positive momentum. While this is all good on a technical basis, I continue to be wary of the fundamental headwinds facing Europe and the weakness in Latin America, China and India. Close inspection shows that most of the current gains in VEU seem to be coming from Europe (perhaps on account of Draghis avowed support for the Euro) and Japan (on account of quantitative easing by the Bank of Japan).

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While technical considerations in this chart and the relative performance chart on the next page make it tempting to add international equities, I would keep my exposure low for all but the most narrowly focused portions of a portfolio.

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 future results.

L a n e A s s e t M a n age m e n t
Asset Allocation and Relative Performance
Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. Commonly, investors

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choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually, or when the actual percentage allocation deviates from the longer-term strategic plan. One useful tool Ive found for establishing and revising asset allocation comes from observing the relative performance of major asset sectors (and within sectors, as well). The charts below show the relative performance of the S&P 500 (SPY) to an investment grade corporate bond index (LQD) on the left, and SPY to a Vanguard Allworld (ex U.S.) index fund (VEU) on the right. As shown on the left, domestic equities continue to outperform investment grade corporate bonds, though momentum is precarious and looks overbought. For now, equities continue to have the upper hand, but the relationship deserves close monitoring. On the right, we see that domestic equities fell behind international during April with momentum also turning decisively in favor of international. As mentioned on the prior page, despite this change of relative performance in favor of international, Im not yet there in terms recommending a change to allocation. For that to occur, I would like to see a break in the moving average trend line in the upper portion of the chart.

SPY, VEU, and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends), the FTSE All-world (ex US) index, and the iBoxx Investment Grade

L a n e A s s e t M a n age m e n t
U.S. Corporate Bonds and Preferred Stocks
LQD represents the total return (capital gains and interest income) for investment grade corporate bonds; PFF represents the total return of the S&P U.S. Preferred Stock index. Regular readers know that I have been very positive for investment grade corporate bonds for a long time as even hiccups have turned out to be brief interruptions to a continuing upward trend. In the past, I have not been concerned about the prospect of slowly increasing interest rates since I expected the

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turnover of bonds to those with higher yields to offset, at least somewhat, the impact of rising rates on the portfolio. Of course, another factor is at work, and that is investor demand. Following a period of relative weakness in LQD during the preceding 5 months, both trend and momentum have again turned positive for investment grade corporate bonds. Despite this positive movement, I continue to believe there are more attractive income oriented investment opportunities, one of which is preferred stocks. As shown on the right, the relative performance of the preferred stock index fund PFF weakened a bit in April but not enough for me to alter my preference for preferred stocks over corporate bonds, especially with PFF yielding about 200 basis points better than LQD. But preferred stocks are not the only income-oriented alternative to investment grade corporate bonds. Investors should look also into emerging market bonds, multi-sector bonds, floating rate corporate loans, REITs and other income strategies that offer a good counterweight to equities and are not as affected by rising U.S. interest rates.

PFF is an exchange-traded fund (ETF) designed to match the experience of the S&P U.S. Preferred Stock index. LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond Index. Prospectuses can be found online. 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
12-Month Performance

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The chart below shows the last 12-month performance of the indicated ETFs, the same ones that are on page 1. The performance speaks for itself, but a few observations may be useful:

Large cap domestic equities (SPY) had another strong month and continue to outshine all other sectors save Europe (which, by the way, still lags SPY by over 30 percentage points on a 24-month basis, so there may be a certain amount of catching up going on). European equities (EZU) bounced back in April and now lead the pack for the last 12 months despite a good deal of volatility. Gold (GLD) hit an air pocket in early April though has recovered some since then. Whether this is a technical correction or a real bottoming is hard to tell at this point. Oil (DBO) continued in April with an extension of a small recovery. Nevertheless, oil is having trouble getting out of the doldrums despite strength in equities and this may be a reflection of troubling economic issues in Europe, Latin America and elsewhere. Emerging Markets (EEM) had a small recovery in April but its still a little early to call this the beginning of a new trend. Investment grade corporate bonds (LQD) had a decent month in April though theres not enough momentum to suggest much more th an continued sideways movement. That said, the trailing12-month total return has been a respectable 8% with very little volatility.

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L an e A ss et M an ag em ent
Disclosures Edward Lane is a CERTIFIED FINANCIAL PLANNER. 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 ones overall risk tolerance and financial objectives. The charts and comments are only the authors view of market activity and arent 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 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 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, CFP Lane Asset Management Stone Ridge, NY Reprints and quotations are encouraged with attribution.