Lane Asset Management Stock Market Commentary December 2013

8/13/2019 Lane Asset Management Stock Market Commentary December 2013

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Economic and Market Recap

As noted in the sidebar, it may be possible

that the driving force behind equity market

gains is shifting from the exogenous effects of

the Federal Reserves quantitative easing pro-

gram to a belief in the sustainability of more

endogenous fundamental issues of economic

growth. Im just sayin. Here are some high-

lights of the factors influencing Novembers

equity performance:

The month began with better than ex-

pected data on U.S. and China manufactur-

ing activity.

The S&P 500 experienced a 1-day hiccup

on the 7th as stronger than expected U.S.

growth raised fears of early tapering, but

one day later much-better-than-expected

job growth and high-than-expected Q3 first

pass estimated GDP growth of 2.8% erased

the prior days relapse.

Dovish testimony from Janet Yellen in her

confirmation hearings in the middle of the

month reminded us that QE still has its in-

fluence as the market set new all-time

highs.

Carl Icahns downbeat message on the

Stock Market CommentaryDecember 7, 2013

Lane Asset Management

Can it be? Are we turn-

ing a page? This past

year has seen equity

prices react somewhat

poorly to positive eco-

nomic news when that

news was linked with a

sooner-than-hoped-for

decision to reduce bond

purchases under the

Feds QE program.

November and the begin-

ning of December looksdifferent. While Yellens

appointment keeps dov-

ish attitudes in play, we

also saw very encourag-

ing economic news in

better-than-expected

payroll growth, new

home sales, factory activ-

ity, construction spend-

ing and consumer confi-

dence connected to a ris-

ing market.

It may be too early to

break out the champagne

but we may be watching

a transition to a more

fundamentally-driven

market as the economy

reaches escape velocity.

18th along with some Fed taper talk shook out

some weak hands as the market quickly

bounced back to set new highs in the 3rd

week.

The market drifted lower at the end of the

month as the turkey was digested only to be

followed in the first week of December with

much-better-than-expected payrolls and re-

vised estimated Q3 GDP growth of 3.6%.

Investment Outlook

As positive 2014 analyst predictions are starting

to emerge, my longer term outlook is cautiously

optimistic. That said, I think a small correction

here would be healthy.

With little change from last month (Ive dropped

emerging markets), as of this writing there are

still areas of relative outperformance, including:

Healthcare, especially biotech

Consumer discretionary and industrials

Large cap value

International developed markets, especially

Europe (though I still favor the U.S.) While investment grade corporate bond re-

turns are skimpy in comparison to recent

years, short term high yield bonds and floating

rate loan funds offer the best opportunity in

the income space.

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 represent ing 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.


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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.

Page 2Lane Asset Management

Last month, I said except for being a little overbought on a short term basis and susceptible to a correction

of 3-5% or so ..., Id have to say that equities are looking pretty good with a rising trend line and improved

momentum with the change in direction for the MACD. My larger concern from a technical perspective,

however, is that the long-term trend is overbought. Well, the correction didnt occur and the analysis held

with the S&P 500 having a terrific month, adding 3% and handily beating the other sectors I follow on page 1.

So, how does the market look now? On the basis of the chart below, I have a little more concern about a correction than I had last month. On

the positive side, SPY is clearly on trend with a rising 50-day moving average (50DMA) and the price right in the middle of the trend. Not

shown but also positive is a rising flow of money into the S&P. On the other hand, momentum (MACD) is at an overbought level and starting to

turn negative. My suspicion is that this could be the beginning of a mild correction in light of the rich market valuation and relatively strong

performance over the last 8 weeks. Therefore, I am going to maintain my cautious yellow light stance. Investors need to evaluate their toler-

ance for risk as the market plows ahead.

S&P 500


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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.


Below is a picture of a longer term (12 year) trend for the S&P 500 (with dividends reinvested), with a spread

from the top of the channel to the bottom of about 17%. In this view, SPY is near the top of the drawn chan-

nel for the 6th time in over 4 years, with each time resulting in a correctiontwice 15-17% and the rest of

the time, about 4-7%. What concerns me is a possible repeat of the experience in 2010 and again in 2011.

On the other hand, while momentum (MACD) softened a bit this past summer, it is currently still rising, unlike those prior

times. This market optimism is seen by some as a contrary indicator (theres always an explanation to support one side of the argument or the

other). My interpretation is that there is good reason to keep exposure to equities at or below ones long term strategic allocation, reserving

some fuel for the next hiccup.

S&P 500The Longer Trend


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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.


International equities, represented here by VEU, are continuing to show characteristic volatility but have

now stalled with weakening trend (the 50DMA) and even greater weakening in the momentum (MACD).

With the recovery that occurred in early September and again in October, price broke through resistance

around $48.10 but is having trouble getting much past that point. At this stage, $48.10 has become a new

line of support.

As Ive mentioned in the past, international equity performance can be very localized. Currently, Germany, Mexico and parts of Asia are outper-

forming the broader index, but not much else. Most of the emerging market countries are running behind VEU.

Remembering that maybe 33% of the revenue of the S&P 500 come from overseas, significant international exposure can be had through a

completely domestic allocation.

All-world (ex U.S.)


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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


Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. Commonly, investors

choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually, or when the actual per-

centage allocation deviates from the longer-term strategic plan. One useful tool Ive found for establishing and revising asset allo-

cation 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 (IGC) bond index (LQD) on the left, and to the Vanguard All-

world (ex U.S.) index fund (VEU) on the right.

Bouncing off of support in early October, equities remain in an up channel relative to IGC bonds and the relationship is still on trend. Despite

the weakening momentum shown on the bottom of the chart, I suspect equities will retain their relative strength for the foreseeable future

even if there are a few hiccups along the way. On the right, domestic equities regained firm control over the broader international index though

an analysis of the relationship with European equities, especially Germany, (also parts of Asia) shows a different picture and a much more even

level of performance, highlighting the need to be very country-specific when investing in international equities.

Asset Allocation and Relative Performance


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HYS is the PIMCO 0-5 Year High Yield Corporate Bond Index which seeks to correspond to The BofA Merrill Lynch 0-5 Year US High Yield Constrained Index SM*. 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.


While income investing has gotten a bad name in the last few months as the reaction to the Feds contem-

plation of tapering its bond purchase program in May resulted in a spike in interest rates, that does not

mean the sector should be abandoned altogether. In prior months, I spoke of the outperformance of pre-

ferred stocks to investment grade corporate bonds. As in recent months, I draw attention to short term high

yield corporate bonds represented here by PIMCOs exchange-traded fund HYS.

On the left below is a 2-year chart of total return for HYS. Over the last 2 years, the annualized gain has been about 9.1%; about 8.5% over the

last 12 months. The chart on the right below contains the relative performance for HYS vs. investment grade corporate bond index fund (LQD)

showing their similarity of performance during a period when LQD was rising last year, but significant outperformance since the first of the year

as LQD has faltered. As I indicated last month, while the relationship looked like it was about to reverse in favor of LQD in October, that hasnt

happened, at least not yet, and appears unlikely as I doubt well see much more interest rate decline.

Income Investing


7/9


This chart shows the percentage increase in 1, 5, and 10-year Treasury rates since the beginning of the year. In percent-

age terms, rates skyrocketed in August and the first week in September with the 1and 5-year rates increasing over 20%

during the period while the 10-year increased nearly 10%. Since then, following a period as rates settled down, the 5-year

rate is inching up to its September high while the 10-year also appears to be gaining ground as it has added over 20 basis

points since last month (2.88% as of this writing vs. 2.65% last month). While some bond managers I read suggest theres

more downside to Treasury rates, I dont see that yet in the charts. Since the outlook remains for higher rates longer

term, I would suggest investments in income-oriented securities should keep durations short, say, under 5 years.

Treasury Rates


8/9


The chart below shows the last 12-month performance of the indicated ETFs, the same ones that are on page 1.

Large cap domestic equities (SPY) plowed ahead again in November with the another improvement in the rolling 12-month performance. Continuing

this performance next month will be more challenging as the chart will lose almost 5% from a year-ago December.

Along with its weakness last month, the Euro Zone (EZU) lost about 7% from November 2012 in last months chart resulting in a loss of 12-monthleadership relative to the S&P 500. Note that the broader international index VEU (not shown) remains below SPY for the 12 months, highlighting the

outperformance of EZU vs. VEU by over 10 percentage points for the period (same as last month).

Gold (GLD) continues to languish. If gold represents the fear trade, theres not much of that evident and, I suspect, that will continue.

Oil (DBO) lost a litt le more altitude in November as tensions eased in the Middle East. Next months chart will be challenging as DBO will lose about

6% from its rolling 12-month average.

Emerging market equities (EEM) had another flat month in November. As with the other equity ETFs, next months rolling average will be challenged

by the loss of strength from a year-ago December.

Investment grade corporate bonds (LQD) continue to struggle as investors anticipate rising rates. Eventually, turnover in the underlying bonds andstabilization in rate expectations will lead to recovery in LQD, but that doesnt seem to be on the near term horizon.

12-Month Performance


9/9

Edward Lane is a CERTIFIEDFINANCIALPLANNER. Lane Asset Manage-

ment 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 li-

censed or exempted. No advice may be rendered by Lane Asset Man-

agement unless a client servi ce agreement is in place.

Investing involves risk including loss of principal. Investing in interna-

tional 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 es-

tablished 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 trans-

action 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

Page 9 Lane Asset Management

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 feed-

back and look forward to addressing any questions you may have. You can find me at:www.LaneAssetManagement.com

[email protected]

Edward Lane, CFP

Lane Asset Management

Kingston, NY

Reprints and quotations are encouraged with attribution.

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 pos-

sibilities 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 con-

tained herein or any decision made or action taken by you or any third party in reli-

ance 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 ex-

pressed 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 ob-

jectives and financial position. The price or value of the investments to which this re-

port relates, either directly or indirectly, may fall or rise against the interest of inves-

tors. 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.
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Lane Asset Management Stock Market Commentary December 2013

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