Lane Asset Management Stock Market Commentary June 2010

8/9/2019 Lane Asset Management Stock Market Commentary June 2010

1/8

Have the Chickens Come Home

to Roost (or to Roast)?

In case youve had better things to do lately and

have missed the news, in the month of May, the

Dow and the S&P 500 dropped about 8%, emerg-

ing markets over 11% and Europe by over 13%.

As Ive noted in recent Commentaries, technical

indicators have been flashing yellow, indicating a

likely market reversal and investing caution. The

weakening process began over the last several

months when Brazil, China and India among

other developing economies, introduced policy

measures to slow inflation as their economies

have been doing quite well. Such tightening meas-

ures depress growth in those regions and profits

from companies previously benefiting (think U.S.

companies).

The largerand more intractableissue is the

one of sovereign debt and related fallout. The

potential consequences of sovereign debt over-

load are severe, inevitably resulting in inflation,

higher interest rates and economic contraction,

not to mention the impact of bond defaults on

banks and institutional investment funds. And

these consequences are appearing more and

more likely as the debt levels of the southern tier

of Europe, the U.K. and even the U.S. become

closer and closer to 100% of GDP.

As a result of these issues, equity prices collapsed

with lower earnings outlook while lower quality

and international bond prices collapsed as risk

premiums have risen.

Meanwhile, concern over the strength of the

Euro and the Pound has resulted in a flight to

safety that drove up the price of U.S. govern-

ment bonds resulting in a decrease in short term

U.S. interest rates by 10-20%(!) taking high quality,

floating rate loan funds down with them.

All of this added up to there being very few

places to hide in May. All major segments of equi-

ties collapsed, preferred stocks collapsed, floating

rate corporate debt collapsed and so on.

Now what?

On a macroeconomic basis, I believe the struc-

tural problems of sovereign debt, extensive un-

deremployment and limited credit availability and

utilization in the developed economies, along with

the deflationary tactics being taken in the emerg-

ing economies, all add up to depressed corporate

earnings and a struggling stock market over at

least the intermediate term, maybe longer. Giventhe globalization of trade, these things have a way

of feeding on one another, so it may be very diffi-

cult to find a safe haven until the market finds

new equilibrium relative to expected earnings.

But, dont take my word for it. While the more

bearish outlook resonates with me, there are

plenty of analysts who see things more positively.

While some say this could be a buying opportu-

Stock Market Commentary

June 2010 Lane Asset Management

Welcome to my new,

shortened format for the

Stock Market Commen-

tary. While I love this

stuff and can go on for

hours, I understand that

many of you prefer a

shorter presentation. Fair

enough.

In the future I will present

one or two pages of high-

lights of the past month

along with my views of

where I believe the mar-

ket is headed. Technical

analysis and charts that

inform my outlook will be

provided.

I hope you find this new

format helpful. As always,

I welcome your comments

and suggestions.

Ed Lane

nity, I continue to rely on technical analysis to

guide my investment decisions. In general, while

such reliance may lead to my coming late to a

party that has already begun and leaving late from

one that has already ended (missing market tops

and bottoms), it has been very useful to me in

taking advantage of major swings in the market as

charts on the following pages show.

While comments on each chart speak to a spe-

cific markets, the overall outlook is decidedly

bearish for virtually all broad equity categories.

High yield and international bonds are also under

pressure. While investment grade corporatebonds are holding steady (for now), the most

strength currently is being shown in U.S. Treasury

bonds, gold and the U.S. dollar. I would have to

say technical indicators are now f lashing red, sug-

gesting extreme caution be taken with regard to

any new investments and consideration be given

to transitioning to safer holdings.

Given the bearish technical analysis and the eco-

nomic headwinds, investors should be prepared

for further downside movement and sluggish

growth once markets stabilize. Assuming short

term cash needs are covered, I would dollar aver-

age out of lower quality equity holdings and have

measured movement up the quality ladder until

the market stabilizes, adding to positions in short

term U.S. Treasury bonds, high quality corporate

bonds and preferred stock, and gold.


2/8

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 2Lane Asset Management

With price breaking through the 150-day moving average and its newly achieved downward slope, momentum for the S&P

500 has turned decidedly negative. The next line of resistance is around 1050. If the index closes below that level, a further

10% decline to the next line of resistance at 950 would not be out of the question.


3/8



This 15-year chart shows that the S&P 500 first crossed its current level in March 1998, thus providing essentially zero return

since then for buy-and-hold investors over that timeframe. Longer term moving averages indicate that the index still has up-

ward momentum (barely), though the MACD is signaling an impending reversal to the downside.

While no system is perfect, from a technical perspective, the S&P is in a precarious position. Couple that with what weknow about structural headwinds in developed economies and strong risk management is advised.


4/8

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.


The emerging markets (EM) index convincingly broke through support at 950 and now looks at 815 as the next line of resis-

tance. The index has now retraced the gains it has made since last September and has provided no return for buy-and-hold

investors since September 2008. Downward momentum is increasing and the EM index finds itself in a precarious place.

While we know the underlying EM economies are currently strong, emerging market countries that depend on exports to

the West may find it challenging to maintain that strength without building a larger domestic consumer base.


5/8



This 15-year chart for the EM index shows a slightly more hopeful pattern in that the longer term 75-week moving average

still has positive momentum. On the other hand, the faster 30-week moving average and, especially, the MACD show signifi-

cant risk to the downside.

Technically speaking, EM looks as nearly precarious as the S&P 500. Strong risk management is advised until a reversal isclearly indicated.


6/8

The gold and U.S. dollar indexes are unmanaged indexes which cannot be invested into directly. Past performance is no guarantee of future results.


For the last 20 years, the price of gold has been reasonably inversely correlated with the value of the dollar (measured, in this

index, against currencies of selected developed economies). In 2010, that pattern seems to be broken as both gold and the

dollar have advanced.

Today, it appears that both gold and the dollar have become storehouses of value but this could also be a bet on a decline inthe future value of the dollaror simply a decoupling to reflect the difficulty of matching the supply of gold with increasing

demand.

Regardless of the underlying rationale and despite the potential for a profit-taking correction, given whats going on in tradi-

tional markets, some exposure to gold appears to be warranted.


7/8

The iShares Barclays 7-10 Year Treasury bond ETF prospectus can be found at www.us.ishares.com.


Reflecting the flight to safety as investors seek the safety of U.S. Treasury bonds, and also reflecting the corresponding de-

cline in U.S. Treasury bond rates over, at least, the last 20 years, this exchange-traded fund holding 7-10 year Treasury bonds

has been on a slow but steady upward climb. Notice the recent increase in volume as well as the emerging strength of the

MACD technical indicator.

Funds of this type appear to be a safe haven for now, but will be damaged if and when U.S. Treasury rates reverse their down-

ward trend as they did sharply in the first half of 2009 (and are expected to do again when the U.S. embarks on a path of fiscal

and monetary tightening).


8/8

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 represen-

tatives 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 interna-

tional and Emerging Markets may entail additional risks such as cur-

rency fluctuation and political instability. Investing in small-cap stocks

includes specific risks such as greater volatility and potentially less li-

quidity. 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 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 8 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

Lane Asset Management

P.O. Box 666

Stone Ridge, NY 12484

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 June 2010

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