April 2010

Lane Asset Management

Stock Market Commentary .. by Ed Lane

The New Normal?

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-
Special points of interest: struction, depressed wage growth, and tight
credit conditions and their impact on do-
 Domestic and interna-
mestic consumer spending (over two-thirds
tional markets did well
of GDP). And, I’m not the only one who
in March and momen-
feels this way. Listen, for example, to
tum continues to look
economists Nouriel Roubini and Joseph
favorable, though with
Stiglitz, PIMCO’s Bill Gross and Mohamed El
increased risk.
-Erian’s ―New Normal‖, and Gluskin Sheff’s
 The employment pic- economist David Rosenberg’s ―Houdini Re-
ture continues to covery.‖ Yet, I’ve been asked ―So, why does
brighten though unem- the U.S. stock market keep going up?‖
ployment remains ex-
While I caution against simple explanations
tremely high.
(including this one), I see three fundamental
 Other economic indica- areas that I believe are holding up the U.S.
tors are generally unim- market (for the time being):
pressive.
 Global government
stimulus spending
has to be given a
lot of credit for the
sudden reversal of
stock market behavior beginning a year
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. companies
(this is the most relevant factor for sus-
tained stock market improvement).
That said, I still rely on technical analysis for
investing and trading decisions as I find that
the most effective way to cut through the
mass of often conflicting information. More
on this in the following pages.

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
Page 2
L an e A ss et M an ag em ent
At-a-Glance
Here is a quick summary of this month’s oriented investments. Technology and cer-
market commentary: tain areas of health care along with consis-
tent dividend-paying sectors (like utilities),
The Economy
bank loan, and preferred stocks will also do
While employment figures showed nice im- well.
provement, other indicators showed little.
My Bottom Line
Overall, we are still in a period of green
shoots. Over the last twelve months, we have ex-
perienced PIMCO’s ―new normal‖ on ster-
The Market
Democracy is a process oids. Even developed markets have done
March was a good month for the stock mar- well as the effects of government stimulus,
by which the people
ket, recovering from the hiccup in January. cost cutting and gains from operations in
are free to choose the
Market momentum remains positive but cau- Asia and emerging markets have boosted
man who will get the
tiously so. returns. It’s not clear how long this can last,
blame.
The Current Opportunities but common sense tells us the pattern of
— Laurence J. Peter
the last twelve months is unlikely to con-
My views from the last several months are
tinue throughout 2010. Accordingly, de-
basically intact. I believe the eventual outper-
pending on one’s tolerance for risk and
formance of the Asia/Pacific (ex. Japan) and
overall financial situation, continuing market
Latin American economies will prove that
exposure should be balanced and wary of
these areas represent the best investment
market potential reversals, especially in the
opportunities for both equities and income-
short run.

The chart above shows March’s 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.
 Page 3
L an e A ss et M an ag em ent
Economic Recap
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. During
March, 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.
History will be kind to
me for I intend to write
it.
— Sir Winston Churchill
 On the other hand, average hourly earn-
ings declined slightly, its first 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 of
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 to
Haver 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 in
concern about slowed growth in those
regions as central banks respond to the
inflationary pressures.
Page 4
L an e A ss et M an ag em ent

Market Recap

In the charts below, we see the one- and ums begin to stabilize, this component of
twelve-month performance of several ex- total return will end.
change-traded and closed-end funds repre-  Total return for investment grade bonds
senting selected investment regions and sec- has also benefited from the decline in
tors. yields over the last twelve months. As
 As the March chart shows, all geo- with high yield bonds, total returns will
graphic regions did well during the be moderate going forward.
month, making up for the ―hiccup‖ that
occurred in January and early February.
An investment in knowl-
edge always pays the  For the last twelve months, the devel-
best interest. oped markets in the U.S. and Europe
have performed similarly and, as ex-
— Benjamin Franklin
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-

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.
Page 5
L an e A ss et M an ag em ent
Market Recap (cont.)
Looking at selected bellwethers represented beginning of the year. This recent decline is
by ETFs in the 12 month and March charts, counterintuitive given the often-discussed
the pattern is similar to that for the regions anticipated weakness in the U.S. dollar, yet
and high yield bonds on the prior page. may be explained by strengthening of the dol-
lar against the weaker currencies of other
Perhaps the most surprising result is the
developed economies, as shown below.
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
The cure for boredom is
and organizations that hold and manage in-
curiosity. There is no
come-producing properties (as opposed to
cure for curiosity.
builders). It should also be noted that this
—Dorothy Parker index 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

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.
 Page 6
L an e A ss et M an ag em ent
Momentum Watch
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
―Fundamental analysis term or secular views.
explains currency move-
On the chart of the S&P 500 index on the
ment in terms of macro-
top of the next page:
economic variables such
as growth, inflation,  Momentum, as measured by the 150-
monetary policy, etc. day exponential moving average (EMA),
One of the weaknesses remains positive, thwarting a possible
of fundamental analysis is inflection point occurring in the 75-day
that it says very little EMA last month.
about the timing of  The MACD (another indicator used to
moves and risk manage- measure direction and strength of mo-
ment. mentum) changed course at the begin-
Timing is an important ning of October, taking a distinctly nega-
part of risk management. tive turn. In February, the MACD began
Even rudimentary techni- to turn positive, but seems to be poten-
cal analysis can help in- tially ―topping out‖ in March.
vestors fine-tune their  The resistance line at 1000 was pierced
entrance into an invest- last August and now forms a support to
ment and help quantify a potential correction. I’ve placed my
the risk. Monitoring the next resistance line at 1200, near the
price action itself will bottom end of the range of my 2010
likely reveal a higher year-end prediction of 1200-1300.
probability of successful
The second chart shows comparable infor-
opportunities….‖
mation for the MSCI Emerging Markets (EM)
— Journal of Indexes
index.
 The 75– day EMA turned decidedly
negative in February but reversed itself
again in March while the longer term 150-
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 per-
formance will be repeated, both the EMA and
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 highs — unsustainable based on prior
experience. While the pattern was broken in
February, it has returned in March. Given the
downside risk I see in the other charts, the
level of this indicator is not exactly bullish and
the yellow flag is out.
Page 7
L an e A ss et M an ag em ent
Momentum Watch (cont.)

Every man serves a

useful purpose: A
miser, for example,
makes a wonderful
ancestor.

— Laurence J. Peter

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.
Page 8
L an e A ss et M an ag em ent
Momentum Watch (cont.)

Politics, n. Strife of
interests masquerad-
ing as a contest of
principles.

— Ambrose Bierce

The S&P 500 and MSCI EM are unmanaged indexes which cannot be invested into directly. Past performance is no
guarantee of future results.
Page 9
L an e A ss et M an ag em ent
My Bottom Line
Is this the ―new normal‖ contemplated by Mo- But the stock market performance for the
hamed El-Erian of PIMCO in which we can look advanced economies, while trailing the devel-
forward to subdued growth in the developed oping economies, has not been too shabby,
economies and more rapid advancement in the either. And, despite the headwinds of persis-
emerging economies and, by implication, corre- tently high unemployment and no real wage
sponding results in the respective stock markets? growth, I suspect this can continue for a
If so, based on the evidence over the last year or while longer while businesses continue to hold
so, here’s what we’ve learned: down costs and take advantage of growth in
Asia and emerging markets by way of exports
 According to Wells Fargo Securities, the
No animal should ever and expanding business in those regions.
2009 GDP growth rate was –3.4% in the
jump up on the dining- Eventually, the developed economies will have
developed economies (bolstered by +0.1% in
room furniture unless to face their greatly expanded public debt. At
Korea) and +2.4% in the developing econo-
absolutely certain that that point, all bets are off.
mies (dragged down by –7.9% in Russia and
he can hold his own in
–6.5% in Mexico), and That’s the macro view, and I use it to inform
the conversation.
my longer term decisions and outlook. For
 Examining selected stock market indices for
— Fran Lebowitz investing, however, I look to what the markets
the last 12 months below, emerging markets
are telling me through technical analysis. That
and Asia/Pacific (excl. Japan) advanced by
message remains positive but cautious. And
about 65% each while the developed econo-
that’s my advice to investors. Consider your
mies of the U.S. and Europe advanced about
own ability to react to market volatility and
40% and 45%, respectively.
your tolerance to it as investment decisions
Directionally, El-Erian has been right — so far. are made.
Page 10
L an e A ss et M an ag em ent
Disclosures
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 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.
We've heard that a
Investors should consider the investment objectives, risks, and charges and expenses of
million monkeys at a
mutual funds and exchange-traded funds carefully for a full background on the possibility
million keyboards could
that a more suitable securities transaction may exist. The prospectus contains this and
produce the complete
other information. A prospectus for all funds is available from Lane Asset Management or
works of Shakespeare;
your financial advisor and should be read carefully before investing.
now, thanks to the
Internet, we know that Note that indexes cannot be invested in directly and their performance may or may not
is not true. correspond to securities intended to represent these sectors.

— Robert Wilensky 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.

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
Edward.Lane@LaneFinancialManagement.com

Edward Lane
Lane Asset Management
P.O. Box 666
Stone Ridge, NY 12484
917-575-0299

Reprints and quotations are encouraged with attribution.

Page 11
L an e A ss et M an ag em ent
Disclosures
The charts and comments are only the author’s view of market activity and aren’t 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 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 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
The nice part about
data. Investment recommendations may change and readers are urged to check with tax
being a pessimist is that advisors before making any investment decisions. Opinions expressed in these reports may
you are constantly be-
change without prior notice. This memorandum is based on information available to the
ing either proven right public. No representation is made that it is accurate or complete. This memorandum is not
or pleasantly surprised. an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned.
— George F. Will 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.