Lane Asset Management Stock Market Commentary November 2011

8/3/2019 Lane Asset Management Stock Market Commentary November 2011

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Market Recap

No sooner did we complete the worst quar-

terly decline since the first quarter of 2009 last

month, than the market followed up with one

of its best monthly performances ever in Octo-ber (sort of makes your head spin). Many rea-

sons were given for the turnaround, including:

a technical rebound from the prior two

months losses, short-covering by those expect-

ing greater deterioration and not getting it,

positive corporate earnings reports

(Briefing.com reports about 70% of Q3 earn-

ings announcements exceed expectations),

better-than-expected Q3 GDP, and encourag-

ing reports on the European debt crisis.

After falling on the opening day of the

month, the S&P 500 (SPY) made a more-or-

less steady climb through most of the rest

of the month to an increase of about 13%before settling back to a near 11% gain (and

is now about even for the year). Emerging

markets (EEM) and Europe (IEV) did even

better by gaining 22% and 20%, respectively,

before falling back to 16%+ and 12%+ for the

month (though both are still down over 13%

and 7% for the year, respectively).

Oil (DBO) also recovered its prior month

loss with a gain of over 14%.

Stock Market Commentary

November 6, 2011

Lane Asset Management

With one of the histori-

cally best months for equi-

ties in October, the ques-

tions are: why did it hap-

pen and does this mark

the beginning of a turn-

around in the bear market

that began in April. To

the first question, many

reasons have been given in

the press (see Market Re-

cap). I suspect all played a

part. The more interest-

ing question is the second.

On purely technical

grounds, I can only say

that it is possible, but not

definite at this point. On

fundamental grounds, I

need to point out that

nothing has yet taken

place to meaningfully ad-dress the debt and em-

ployment issues in the de-

veloped economies. But,

hope springs eternal —

and maybe that’s what we

have been seeing.

Comments are welcome.

— Ed Lane

Gold (GLD) wavered throughout the month,

but recovered about half its decline of the

prior month and turned in a respectable 6%.

The aggregate bond index fund (AGG) suffered

just a bit as money moved to equities, but

closed the month about even (interestingly, an

investment grade corporate bond index fund

(not shown) turned in a whopping 2.5% gain, all

achieved in the final two weeks of the month).

U.S. Treasury bond rates rose slightly with 10-

year rates gaining about 30 b.p. as investors

moved money out of Treasuries and into equi-

ties. _____________________ (cont.)

As you view this chart and on the following pages, note that I am now using exchange-traded funds (ETFs) rather than market indexes since indexes cannot be

invested in directly and the ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity.

Prospectuses on these ETFs can be found with an internet search on their symbol. Past performance is no guarantee of future results.



Economic Outlook

The economic outlook remains weak. Little has changed

since last month. Here are the factors that concern me

the most (in no special order):

Housing: The Case/Shiller index of property values is

still nearly 4% below its level a year ago but continues

to stabilize. This looks to be a long term problem un-

til the overhang of housing is cleared and/or employ-

ment recovers. And among dangers is that weak and

weakening housing values depress consumer spending

which then becomes a feedback loop leading to further

reductions and potential deflation.

Employment: October job data announced at the be-

ginning of November was 80,000 non-farm payroll jobs

vs. 100,000 expected. Though not nearly enough,

prior months’ figures were revised upwards from

103,000 to 158,000 for September and 0 to 104,000 for

August. This chart tells the longer term story of a de-

cline in the employment-to-population ration and the

labor force participation rate. The question I ask my-

self is, in light of what I would call the unrealistic em-

ployment derived from the credit-induced bubble pre-

ceding the current recession, what level of (un)-

employment is realistic going forward?

European debt: The sovereign and bank debt crisis in

Europe threatens the entire financial world. Through-out October, there were off again, on again reports of

the Europeans reaching an agreement that would solve

their debt problems. While that saga continues today,

virtually everything I read indicates that the so-called

solution on the table is hardly that. This crisis is far

from over.

American debt: The U.S. also has its debt issues, both

public and private. Speaking from a stock market per-

spective, the focus on reductions in government spend-

ing in the next several years cannot but hinder GDPgrowth and corporate profitabi lity. This saga is about

to play out late in November as the so-called Super

Committee comes forth with its recommendations.

Political gridlock: Evidence continues to be absent for

a break in the political gridlock in Washington. Far

from it.

Although I have low expectations for the economic out-

look over the next several years, with the Q3 GDP report

of an annualized 2.5% growth, it’s not clear that we will

actually experience a ―double-dip‖ despite how it feels.

Investment Outlook

The investment outlook has to be seen as shaky based on

the above comments and the technical analysis on the fol-

lowing pages. The volatility alone has to give pause to any

firm short or medium term prediction of stock market

performance.

Stock Market Commentary


While I don’t think the equity market will go gang-

busters anytime soon, I do think there are some

positive factors that are worth keeping in mind.

Please link to this report for a good summary.

Now that the equity market has recovered from

most of the slump that occurred since last July and

is about even for the year, in light of the saga in

Europe and the lack of compromise in Washing-

ton, where we go from here is much harder to

forecast. Some see a winter rally, others see more

turmoil as economic and political realities just

won’t go away.

With the relative strength of equities over bonds

that emerged in October (see p. 7), a case can be

made for increasing equity exposure. I would be

prepared to do so, but slowly in light of the daily

drama coming out of Europe and Washington.

Bearing in mind that these recommendations re-

flect current relative performance, my suggestions

as of this writing are:

High quality, dividend paying common or pre-

ferred stocks (minimizing large financials)

Broad market indexes such as the S&P 500, and

especially mid- and small-cap U.S. stocks

For sectors, regional banks, energy, consumer

staples and utilities

Investment grade and high yield corporate

bonds

For taxable accounts, municipal bond funds.

Investors need to be prepared for continuing vola-

tility.

http://www.schwab.com/public/schwab/resource_center/expert_insight/todays_market/sonders/sonders_103111.html





SPY is an exchange-traded fund designed to match the experience of the S&P 500 index. Its prospectus can be found online. Past performance is no guarantee of future results.

Page 3Lane Asset Management

The S&P 500 (SPY) has failed to get past the resistance level at 135 (think 1350 for the S&P 500 index) so

far this year. In October, there was a sharp rebound off the support level at 112 with a current standing

right in the middle of the trading range 112-135. On a technical basis, the 75 – and 150-day moving aver-

ages (MA) have moved to a positive outlook, though greater momentum would be evident if the faster

MA moved above the slower one. As ―predicted‖ last month, the shorter term MACD indicator presaged

the October bounce. While still positive, that indicator is showing a bit of weakness as of this writing. On

the other hand, the longer term MACD at the bottom of the chart is showing the emergence of a positive outlook.

While the balance of this chart points to a positive outlook, that should be tempered with an understanding of the economic and political

headwinds that can cause a reversal just as sharp as the one that occurred in October. Now that relatively strong third quarter corporate re-

sults have come in (70% of those reporting beating expectations so far while revenue trends are down 10 percentage points to 62% beating

expectations) and that economic signals remain sluggish at best, we have ―only‖ the outcome of political events in Europe and the U.S. to look

forward to for the rest of the year. Taking that all into account, I am willing to add equity exposure here, but remain cautious with a fair de-gree of cash or low volatility bond funds on the sidelines.

S&P 500





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.


AGG represents the total return (capital gains and interest income) of a composite of domestic govern-

ment and investment grade corporate bonds and similar instruments. LQD represents the total return

for investment grade corporate bonds alone.

Note the flatness of the performance in late 2009/early 2010 that corresponds to an increase in interestrates at the time. In October, AGG basically remained flat while LQD experienced a sharp increase in total value. Since

Treasury rates ticked up in October, I believe that LQD’s performance was caused by a sharp increase in demand for corporate bonds (high

yield corporate bonds had the same experience) as not everyone jumped on the equity bandwagon (and some bailed out toward the end of the

month). Therefore, we might expect some volatility in corporate bonds in the coming weeks similar to what we saw in August. That said, both

AGG and LQD represent reasonable ―safe‖ investment categories with a little more technical support for LQD. While deteriorat ion will occur

when interest rates begin to rise, that risk seems to be off the table for now with the Fed’s commitment to keep rates low un til 2013.

U.S. Aggregate and Corporate Bonds



Past performance is no guarantee of future results.


The chart below shows the 12-month performance of selected exchange-traded funds representing various market seg-

ments. Several observations can be made:

The divergence between the U.S. and international markets may be giving an early indication of an opportunity with the

international markets as markets tend to normalize over time. However, as stated earlier, I believe the safest course re-mains with overweighting U.S. equities at the present time.

Despite the decline in emerging markets, it is useful to note that EEM outperformed SPY over the last 3 years by over

10%. The more rapid decline of EEM in the last two years may simply reflect the convergence of the global experience of large U.S. compa-

nies and emerging market companies.

Oil remains highly correlated to the equity markets for the most part and may provide little diversification.

Bonds continue to turn in a respectable performance with low volatility.

While gold provided a good hedge against the decline in equities that occurred July-September, it gave it back relative to equities in October.

12-month Sector Comparisons



SPY, VEU, and AGG are exchange-traded funds designed to match the experience of the S&P 500, the FTSE All-world (ex US) index, and the Barclays Capital U.S. Aggregate Bond Index,

respectively. Their prospectuses can be found online. Past performance is no guarantee of future results.


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 I’ve 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 aggregate bond index (AGG) on the left, and SPY to all-world (ex U.S.) (VEU) on the right.

On the left, we can see that the S&P 500 began outperforming bonds in October as suggested in last month’s commentary. While we are still

in the early stages of this relative performance, support is there to increase exposure to equities relative to bonds. On the right, we can see the

S&P 500 outperforming the all-world (ex U.S.) index ETF, a pattern that began in August. Note the bottom technical indicators have turned in

favor of the international index while the moving average of the relationship remained positive in favor of the S&P 500. This may be a short

term phenomenon on account of the recent volatility of the markets. As said previously, I believe the safest course remains to overweight U.S.

equities against international markets at the present time.

Asset Allocation and Relative Performance



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 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 one’s overall risk tolerance and financial objectives.

The charts and comments are only the author’s view of market activity

and aren’t 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


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 aren’t predictive of any future

market action rather they only demonstrate the author’s 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.

http://www.lanefinancialmanagement.com/


mailto:[email protected]




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Lane Asset Management Stock Market Commentary November 2011