February 5, 2011

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Recap Economic Outlook over 22%. While the technical trend remains
January’s stock market was a bit of a roller-coaster, From my lens, the economic outlook (not to be positive, I don’t see how this can continue for
but ended up well for the U.S. and Europe (of all confused with the investment outlook) is still trou- much longer without either a profit-taking moti-
places) while emerging markets and gold lost bled. Yes, corporate profits are up along with vari- vated correction or an adjustment to a newly
ground. For the month, the S&P 500 gained about ous manufacturing and nonmanufacturing indices. recognized reality of slower growth in the
2.25% while Europe gained over 3.5%. The emerg- That said, employment and housing remain de- world’s economies. That said, momentum re-
ing markets index lost 2.8% and the gold index lost pressed, state and local governments are in terrible mains strong, especially for the large industrial,
Equity markets have been on technology and energy sectors.
over 6%. financial shape and will be cutting expenditures
a tear for the last five
The S&P continues to surprise many analysts as it (read: employment), and the federal government  Emerging markets are under a great deal of pres-
months with only one minor
correction last November. has tacked on over 22% since the beginning of last will be facing stronger headwinds in any attempt to sure as inflation fighting policy actions threaten
It is unlikely that this pace September in an almost uninterrupted advance. further stimulate the economy. to curtail high rates of growth. The Financial
can be maintained for much Times reports that investors withdrew from
The way I see it, the tailwinds of strong corporate Despite relative stability in the dollar over the last
longer without interruption.
earnings and revenue gains is overwhelming the 4 months, oil has been on a steady climb and is emerging market funds at the fastest weekly
Although overly simplified, pace in 3 years resulting in a decline in share val-
headwinds of a credit crisis in Europe, inflation now hovering around $100/barrel. This acts as a
the question for investors is
fears in emerging markets, the turmoil in the Mid- tax on consumers and businesses alike and shows ues by nearly 3% (11% for India). (Interestingly,
whether to ride out a likely
dle East, not to mention the struggling housing little sign of abating in the near future. the money seems to have gone to the U.S. mar-
but not certain storm or to
take money off the table and market and persistent unemployment in the U.S. kets, contributing to high relative growth). As
Outside of the U.S., Europe has a long way to go to
wait for a more attractive happened before, once emerging markets get in-
The weakness in emerging markets is more under- address its banking and sovereign debt crisis. Fur-
entry point. flation under control, above average equity re-
standable as rising inflation is resulting in policy ac- thermore, its approach for doing so by reducing
For my part, I lean toward turns can be expected. While the short term
tions to slow the pace of growth. Likewise with spending may be the right answer in the long term,
hedging my “bets” by nar- looks shaky, the longer term outlook remains
Europe, despite the views of my favorite econo- but will depress the economies in the short term (I
rowing the focus of equity good.
investments, increasing sensi-
mists and market analysts that Europe has hardly think that’s why we are avoiding these actions in
tivity to changing market solved its debt problems, strong growth from Ger- the States). As for emerging markets, rising infla-  In the income-oriented space, the outlook for
trends, and adopting conser- many has overwhelmed the credit concerns — for tion has resulted in policy actions to put a damper the bond markets looks challenged as interest
vative option strategies. now. on growth. rates are creeping up. On the other hand, pre-
As always, I welcome your Gold’s decline was probably more a result of con- ferred and high quality dividend-paying stocks
Investment Outlook
comments and suggestions.
tinued profit-taking as the dollar also declined in and variable rate loan funds look to benefit from
I see the investment outlook as follows: the current environment.
— Ed Lane January. Of all these indices, gold had the most to
lose on the heels of its outperformance over the  I am concerned about the sustainability of the The charts on the following pages provide selected
preceding 12 months. advance in U.S. equities. In January, the increase technical analysis of these and other markets.
in the S&P 500 was over 2%.; the 2-month in-
crease was over 8%; and the 5-month increase
 Page 2
L a n e A s s e t M a n age m e n t
S&P 500 Index
The S&P 500 index experienced a minor correction in November at its previous line of resistance, but
bounced back strongly since partly as a result of a reallocation of funds from emerging to the developed mar-
kets. On a technical basis, the 75– and 150-day moving averages remain positive although the MACD (another
moving average-based momentum indicator) is showing signs of fatigue. The index is now hovering around its
new technical line of resistance at about 1300 which gives some reason for caution. At this point, giving due
regard to the economic headwinds in the U.S. and other developed economies, but also keeping in mind the stronger, but overheating, econo-
mies in the emerging markets, it is premature to get overly excited about the sustainability of the current uptrend in the S&P 500. The cau-
tion light is out and any additional exposure to U.S. equities should be entered into slowly and carefully with the understanding that a pullback
of 10-20% or so would be consistent with the pattern established over the last 12 months.

The S&P 500 index is an unmanaged index which cannot be invested into directly. 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 Page 3
Morgan Stanley Emerging Market Index
The MSCI Emerging Market Index had a setback in November and again in January as a result of concerns of
overheating economies and government policy actions to control rising inflation. Large withdrawals from
emerging market funds in January has brought down prices while the infusion to domestic markets had the
opposite effect. The 75– and 150-day moving averages are slowly grinding upwards while the MACD, a shorter
term indicator, began to weaken in mid-October and is yet to turn positive for long (with about the same re-
sult for the index). A positive sign is the retention of the breakout above the last support line at 1050 while, on the other
hand, 1200 is proving to be a difficult line to break through. Given the generally positive fundamental outlook, this may be an opportunity to
“buy on the dip” for more aggressive investors. Others may want to wait a bit longer for a confirmed move upwards. At this time, I suggest
investors be cautious of the “risk-on” trade in emerging markets.

The MSCI Emerging Markets index is an unmanaged index which cannot be invested into directly. 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 Page 4
Barclays Capital Global Bond Index
The Barclays Capital Global Bond Index represents the returns of a composite of domestic and international
government and corporate bonds and similar instruments. As such, it blends bond yields available globally
along with the impact of currency fluctuations. As shown in the chart below, this index has a steady upward
momentum with very low volatility. It should be noted that the performance of the securities in this index
has been a beneficiary of declining interest rates and decline in the value of the dollar, producing capital gains along with interest
income. With the expectation that interest rates will be rising in the future, that component of the total returns in this index will be harder to
achieve in the future. On the other hand, there are other components of total return including higher interest rates abroad and currency move-
ment that can prove beneficial. For the portion of a portfolio where capital preservation has a high degree of importance and also to provide
diversification, an allocation to a global bond portfolio may be appropriate. While a stable or declining interest rate environment would be
positive for this index, the current upward pressure on rates in both developed and emerging markets does not bode well for this index at the
current time.

The Barclays Capital Bond—Global Index is an unmanaged index which cannot be invested into directly. 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 Page 5
Gold and Silver
The chart below shows the 5-year monthly performance of gold and silver indexes, along with a comparison of
the performance of a U.S. dollar index. The chart shows an inverse correlation in the price of the metals
against the value of the dollar except for the period November 2009 through May 2010 when the dollar ad-
vanced as did the price of the precious metals. The inverse correlation is understandable as the metals can be
seen as an alternative to fiat currency. But other factors are clearly at play as the metal prices have advanced far more than the value of the
dollar has declined. The primary answer, I believe, has to do with supply and demand imbalances caused by market and geopolitical uncertainty.
If that’s the case, then a good argument can be made for continuation of strong performance in these (and other) precious metals as long as
governments (and others) around the world stockpile these metals as a hedge against future inflation or as an alternative to holding dollars.
That said, as shown in 2008 and as suspected by some today, the value of the metals can be quite volatile and can contract rapidly. An interrup-
tion in the pace of price advances should not come as a surprise and might be taken as a buying opportunity. Therefore, caution is advised when
investing in precious metals.

This chart shows the performance of gold and silver indexes created by stockcharts.com that are intended to represent prices of the precious metals and is a very close approximation to the
value of exchange-traded funds that hold these metals. These unmanaged indexes cannot be invested into directly. 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 Page 6
Year-to-Date Index Comparisons
The chart below shows the 12-month performance of selected indexes. Several observations can be made:
 A high degree of correlation can be seen among the equity markets.
 While performance of the S&P 500 has lagged emerging markets for the last 12 months, the gap is closing.
 European equities lagged all equity markets, but is catching up as of late.
 After suffering the largest decline in the first 5 months of the period shown, oil has rebounded the most strongly and now
shows the highest total return over the entire period as well as the strongest current momentum..
 Global bonds have turned in a highly respectable performance with low volatility but incremental improvement is evaporating.
 Gold performed extremely well for the first 11 months but began a sharp decline in late December. If this is as a result of profit-taking, as I
suspect, this reversal will not be long-lived.

Past performance is no guarantee of future results.

Page 7 L an e A ss et M an ag em ent
and related exchanged-traded and closed-end funds are selected based on his opinion
Disclosures 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
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Investing involves risk including loss of principal. Investing in interna- tained herein or any decision made or action taken by you or any third party in reli-
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This information is intended for illustrative purposes only. PAST PERFORMANCE
your financial advisor and should be read carefully before investing.
DOES NOT GUARANTEE FUTURE RESULTS.
Note that indexes cannot be invested in directly and their performance
may or may not correspond to securities intended to represent these Periodically, I will prepare a Commentary focusing on a specific investment issue.
sectors. 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 :
Investors should carefully review their financial situation, making sure
www.LaneAssetManagement.com
their cash flow needs for the next 3-5 years are secure with a margin
[email protected]
for error. Beyond that, the degree of risk taken in a portfolio should be
commensurate with one’s overall risk tolerance and financial objectives. Edward Lane
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and aren’t recommendations to buy or sell any security. Market sectors P.O. Box 666
Stone Ridge, NY 12484