July 6, 2012

Economic and Market Recap

L a n e A s s e t M a n age m e n t
Stock Market Commentary
year on renewed hopes of a Spanish bank bailout

stubbornly weak global economic news, the avoidance of bank failures in Europe (or the appearance thereof) was enough to bring euphoria to the market, at least temporarily (dont forget what happened when Lehman failed). Does this give you confidence in the near term future of the market? Investment Outlook My outlook is a bit mixed in that I believe the structural headwinds of high unemployment and debt in Europe and the U.S. will take many more years to unwind while it may also be possible that the markets have more or less fully discounted these factors. On balance, risks are to the downside while opportunities exist on the political front to keep things from getting worse and even bring some measure of improvement. And this is what is meant by those who describe bi-modal expectations for the market. How an investor responds to the current environment depends on ones risk tolerance and investment time horizon. From a technical perspective, as discussed on the following pages, there is some support for equity additions, especially international, though I would focus on emerging markets and Asia (ex Japan), not Europe. The safest course remains to overweight quality equities and income.

I wish there was space to share with you every If youre thinking about the struggling global economy (who isnt) you might be wondering how the S&P 500 rose over 4% in June and 9.5% year-to-date (or even 3.8% in the last 12 months). Theres no easy answer, but one that I like is that the performance of the large companies represented in the index is a subset of the economy as a whole a subset that is most adept at spreading its risk globally and managing its expenses and profit. If Im right, the lesson is that fears about the economy in general should not necessarily translate into fears about segments of the economy, in this case, large U.S. multinationals. Its true, we have many large hills yet to climb. Yet, money finds a home and there will always be places to invest, but keep your expectations in check.

notable thing that happened in June to move the markets. Since there isnt, Ill greatly simplify with a sample of what was important:

Stocks move higher on optimism about the bank bailout in Spain Stocks drop in their second worst day of the year as the price of the Spanish bailout rises and economic indicators worsen in China and the U.S. Stocks rallied on the last day of the month on surprise news of from Europe to save weak banks in Spain and the region, boosting stocks to their best June in 13 years (though not enough to overcome Mays decline).

June opened with the worst day of the year following disappointing U.S. jobs data News of a deal in the works to rescue Spanish banks reverses the markets course Stocks rallied to their best day of the year on dovish comments from the Fed but sputtered the next day as Bernanke offered no signal of further stimulus Stocks closed out their best week of the

Have you got the picture yet? In the face of

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
Last month, I observed there was technical support for further deterioration in the S&P 500 while there was also fundamental support for a rebound in the market. Consequently, I suggested SOH (sit on hands) until technical support appeared to confirm direction in one way or the other. As it turned out, taking the month as a whole, SOH would have worked out well except for the very last day of the month when the S&P gained 2 1/2% on news of a new program to save Spanish and other weaker EU banks. Does the news change the recommendation going forward? In my opinion, not quite yet. As can be seen

Page 2

below, SPY is hovering around the line of support/resistance of $135 while the moving averages have flat-lined. On the positive side, the faster MACD indicator (the chart in the middle) is showing some positive reversal, though this is not confirmed by the slower MACD (the bottom chart). Moreover, we may have seen this picture before just 12 months previous. In essence, we have no strong technical support for S&P advancement. In addition, IF the reaction in June was primarily a correction to the May decline triggered by the EU news, the benefits may be short-lived. My bottom line is that I would limit additional exposures for now (SOH) until we have more confirmation on the markets direction. I expect that to come with key economic reports during the month (we got off to a bad start with Junes ISM Manufacturing index falling for the first time in 3 years and Junes disappointing unemployment report completing the worst quarter in 2 years) and 2Q2012 corporate earnings.

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.)
Last month, I noted that VEU was reaching a level of support around $35 that, on an historical basis, proved an effective reversal point. While I advised waiting for additional confirmation on the price support (except for more aggressive investors who got more of a green light), the confirmation came rather quickly and, indeed,VEU had a very healthy recovery in June (up 6.5% after a little scare toward the end of the month). While we can attribute the reversal to the news on Europes apparently finding a way to protect Spanish and other weak regional banks, Id like to think that the technical observation also was a significant contributor.

Page 3

So, what now? On the fundamentals, its rather hard for me to accept that Europe has solved all its problems. Yet, it may have very well met its biggest immediate challenge (avoiding a Lehman-type bank collapse), and (hopefully) made it a little easier to take the next steps for more coordinated fiscal management of the Eurozone. On a technical basis, were not quite out of the woods with the moving averages continuing to have a negative slope, price remaining below the averages, and only the faster MACD (the middle graph) showing a positive outlook. Accordingly, my advice remains pretty much the same as last month: be cautious about adding international exposure though aggressive investors may take advantage of the current opening. If additions are to be made, I would avoid Europe and focus on emerging markets and Asia (ex Japan).

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

Page 4

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. Although June showed a reversal in the relative performance of U.S. equities to bonds in the chart on the left, especially in the bottom two indicators, we saw a similar picture a year ago when the pattern failed. While the moving average of the relationship is still in a downward trend, Id go slow transitioning from overweight bonds to overweight equities. On the right, we have somewhat of a similar situation to the chart on the left. During June, international equities outperformed domestic and the bottom indicators reflected this change underway. On the other hand, the trend of the moving average still favors domestic equities and this is where I would keep my relative weighting.

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 Corporate Bond Index, respectively. Their prospectuses can be found online. Past performance is no

L a n e A s s e t M a n age m e n t
U.S. Aggregate and Corporate Bonds

Page 5

LQD represents the total return (capital gains and interest income) for investment grade corporate bonds; AGG represents the total return of a composite of domestic government and investment grade corporate bonds and similar instruments (think of it as LQD but with government bonds). The chart on the right shows the relative performance of LQD to AGG which, except for brief periods, has been positive for most of the last two years, supporting the thesis of investment grade corporate bonds over government bonds. From a technical perspective, its hard not to like investment grade corporate bonds. Not only has the last two years been extraordinary, but this performance goes back to the early 80s when interest rates were at their highest. Yes, certainly a large part of the past performance can be attributed to the decline in interest rates and this is a phenomenon with a limited future, we can all agree. But with the index holding bonds of various durations, and with the Fed determined to hold short term rates near zero until late 2014, the impact of rising rates (if occurring slowly) is likely to be more muted than many people might expect. In early March, I was concerned about the extent to which LQD had gotten above its trend line which also showed up in the relative performance chart. That problem corrected itself later in March and performance in both charts is back on trend. The picture looks similar at the end of June and some deterioration should not come as too much of a surprise. That said, investment grade corporate bonds continue to be attractive in an unsettled environment.

AGG is an exchange-traded fund (ETF) designed to match the experience of the Barclays Capital U.S. Aggregate Bond 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

Page 6

The chart below shows the 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:

Investment grade corporate bonds have not only performed best over the period, but with the least amount of volatility. While past performance is no guarantee of future results, especially when we experience rising interest rates, I believe the structure of the index will limit the impact of rising rates and the historically low volatility will continue. Despite the angst about the global economy, gold has not lived up to the expectations of many in the last year. I admit, I am not a gold bug and belief in its ability to hedge against growing sovereign debt is suspect in my mind. Oil provides a useful indication of the state of the economy. It also may be a better hedge against a dollar decline than gold (a topic for another day). The S&P 500 continues to demonstrate lower volatility and better performance than international (ex U.S.) equities over extended periods of time (also a topic for another time). That doesnt suggest avoiding international equities, but is meant to say its important to pick your moments.

Page 7

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.