May 2010
Lane Asset Management
Special points of interest:
 Structural headwinds of
sovereign debt over-
load combined with a
technically overbought
market combined to
slow the market at the
end of the month
 U.S. investments have
benefited from reve-
nues and profits de-
rived from emerging
markets
 The markets have en-
tered a volatile stage
Inside this issue:
One (complex) world 1 headwinds. I have come to believe that is
At-a-Glance 2 the recession and again in the recovery). De-
Economic Recap 3 spite my earlier view that the markets of the
Market Recap 4-5
Momentum Watch 6-8
My Bottom Line 9
Disclosures 10-11 emerging reversal of the housing slump, reju-
Stock Market Commentary .. by Ed Lane
One (complex) world
The last couple of months have been very
instructive. While a number of my invest-
ment ideas have held up so far (especially on
the technical side), I have also learned some
new things that have altered my thinking.
As you may know from reading my prior
Commentaries, I am wary of fundamental
market analysts since there are so many well
-sounding but competing views of the mar-
ket, it’s hard to sort things out among them.
That said, one point of view that resonates
with me comes from PIMCO and is often
expressed by its CEO and co-CIO Mohamed
El-Erian.
El-Erian introduced the concept of a ―New
Normal‖ that basically lays out the idea that
foreseeable future growth in developed
economies will be more subdued than in the
past and economic prospects (and, there-
fore, investment opportunities) will be
brightest in the emerging economies. He
also lays out the idea that stock markets are
experiencing cyclical tailwinds and structural
the best one-line description of the current
market environment I have heard from any-
one — and it has put in perspective the
events of the last several months.
One the cyclical side, we have the proverbial
green shoots, including steadily improving
employment numbers, deceleration and
venated consumer spending and, most im-
portantly, improved corporate profits even
exceeding expectations. Over the last sev-
eral months, these
were some of the pri-
mary factors driving
markets higher, espe-
cially in the U.S.
On the long-term structural side, the 8-plus
million unemployed in the current recession
in the U.S. (and even higher unemployment in
parts of Europe) and the explosion of sover-
eign debt, not to mention a wall of emerging
liabilities in retirement and health care, in
crumbling infrastructure and in energy source
transformation, are all inescapable hurdles
that will prove challenging to markets, to say
the least.
Long term issues eventually become short
term issues and that’s what seems to have
happened here at the end of April as the sov-
ereign debt problems in Greece and potential
fallout elsewhere have thrown cold water on
a technically overbought market giving rise to
at least a short term correction.
Note also how world markets have moved
more or less in tandem (as they did during
emerging economies would outperform the
U.S. this year, so far, that has not taken place
for perhaps two reasons: First, U.S. compa-
nies have increasingly benefited from reve-
nues and profits generated in the emerging
economies and, second, stock performance of
local companies in those economies has been
trimmed by local policy actions to stifle infla-
tion brought about by their rapid growth.
Page 2
L an e A ss et M an ag em ent
At-a-Glance
Here is a quick summary of this month’s
market commentary:
The Economy
While employment figures showed nice im-
provement, other domestic indicators
showed little. Concerns over sovereign debt
in Greece and a potential larger fallout are
beginning to dominate the economic scene.
It has been said that The Market
man is a rational animal.
April was a challenging month for the market.
All my life I’ve been
By month’s end, sovereign debt issues and
searching for evidence
―Greece-contagion‖ in Europe and over-
that could support this.
heated economies in emerging markets com-
— Bertrand Russell bined to take the wind out of the sails on
markets worldwide. Technical momentum
indicators are continuing to weaken.
The Current Opportunities
My views from the last several months are
basically intact. I believe the eventual outper-
formance of the Asia/Pacific (ex. Japan) and
Latin American economies will prove that
these areas represent the best investment
opportunities for both equities and income-
oriented investments. Yet, recent underper-
formance of their markets has caused me to
rethink my position.
derestimated the impact of foreign, primar-
ily emerging market-sourced, earnings on
the P&Ls of U.S. corporations. These two
factors have led to nearly a 6% outperfor-
mance of the S&P 500 over the EM index
for the first 4 months of 2010 despite a 9%
underperformance for the last 12 months.
As a result, I have become more supportive
of investment in U.S. equities as long as rela-
tive performance remains intact.
Technology, materials and certain areas of
health care along with consistent dividend-
paying sectors (like utilities), bank loan, and
preferred stocks will also do well.
My Bottom Line
Market support from cyclical tailwinds
(corporate earnings and gradually improving
U.S. employment and other indicators) are
being buffeted by the larger structural issues
of sovereign debt loads. I would let the cur-
rent market shake itself out before making a
major commitment to add to positions.
More aggressive investing might take advan-
tage of what I believe to be current anoma-
lies in emerging markets and short term
income funds.

While still supportive of these markets over

the long term, technical indicators suggest a
challenging environment, at least for the
short run, while local actions to constrain
inflation dampen economic performance
(even if it is still better than in developed
economies). On the other hand, I also un-

The chart above shows April’s total return from exchange-traded funds for, respectively,
the S&P 500, Europe, emerging markets, high yield bonds, Asia/Pacific (ex. Japan) and invest-
ment grade bonds.
 Page 3
L an e A ss et M an ag em ent
Economic Recap (as of April 30th)
Jobs and credit, the primary sources of a
consumer-led economy, are two of the best
bellwethers to watch if you want to see
where the U.S. economy is headed. (Note
that this is not necessarily indicative of the
U.S. stock market performance which, in ad-
dition to the local economy, benefits from
growing revenues and profits from overseas,
especially from emerging markets.)
During April, news continued on a positive
track, but key indicators remain far behind
pre-recession levels:
Facts are stubborn things,  The BLS reported the unemployment
but statistics are more rate increased to 9.9% while employment
pliable. rose by 290,000 in the establishment sur-
vey, over 80% of which was in the private
— Mark Twain
sector. March employment figures were
adjusted upward from 162,000 to
230,000.
 On the other hand, according to the AP,
average hourly earnings increased by a
penny in April.
 The Federal Reserve reported that the
4.0% year over year decline in credit out-
standing remained near the record. Ac-
cording to Haver Analytics, during the
last ten years, there has been a 60% cor-
relation between the annual change in
credit outstanding and the change in
personal consumption expenditures.
Other economic news of interest includes:
 After rising sharply in March to about
4%, the interest rate on 10-year Treas-
ury bonds fell sharply to 3.69% by the
end of April (and fell a further .24% in
the first week of May) as concerns over
the sovereign debt crisis led to a ―flight
to safety‖ in U.S. bonds.
 On the international front, the biggest
news is the growing concern about sov-
ereign debt loads in Greece and certain
other weak members of the EU. At the
same time, continuing strength in the
Brazilian economy led its central bank
to increase its target rate by 75bp to
9.5%. This phenomenon of policy re-
straints is also occurring in India, China
and certain other emerging economies,
mostly in Asia and the Pacific region.
Page 4
L an e A ss et M an ag em ent

Market Recap (as of April 30th)

In the charts below, we see the one- and
twelve-month performance of several ex-
change-traded and closed-end funds repre-
senting selected investment regions and sec-
tors.
 Total return for high yield bonds has
been keeping pace with EM and AxJ as
risk premiums decline. As those premi-
ums begin to stabilize, this component of
total return will end.

 As the April chart to the right shows, all
Learn from the mistakes
of others. You can’t live
long enough to make
them all yourself.
— Eleanor Roosevelt
 Total return for investment grade bonds
geographic regions experienced signifi- has also benefited from the decline in
cant volatility with Europe having the yields over the last twelve months. As
sharpest decline (owing to the sovereign with high yield bonds, total returns are
debt concerns in Portugal, Italy, Ireland expected to be moderate going forward.
Greece and Spain, the so-called PIGS,
especially Greece) with a spillover effect
on emerging markets (EM) and Asia/
Pacific ex Japan (AxJ).

 For the last twelve months, EM and AxJ

have outperformed the developed mar-
kets of the U.S. and Europe, as expected
(exacerbated, in Europe’s case, by sov-
ereign debt problems of Greece and
others).

A prospectus for the above funds can be obtained through this website:
http://moneycentral.msn.com/investor/research/etfs.aspx or from your financial advisor.
Page 5
L an e A ss et M an ag em ent
Market Recap (cont.)
Looking at selected bellwethers represented The global materials sector (MXI) took the
by ETFs in the 12 month and April charts on biggest hit in April (though still holding up
this page, the pattern is similar to that for well for the last 12 months) as the more suc-
the regions on the prior page. cessful emerging market economies apply
braking action to counteract local inflation
In a continuing surprise, real estate
concerns.
(represented by IYR, commercial and resi-
dential REITs, not homebuilders) outper-
forms the other benchmarks. (It should also
be noted that this index remains 27% below
I think that if maybe
its value 3 years ago (vs. 22% for the S&P).
women and children
That said, with stress in commercial and
were in charge we
residential real estate, performance of this
would get somewhere.
sector seems to be a prime candidate for a
— James Thurber potential correction.

Gold is showing strength in the face of the

sovereign debt challenges in Europe. In fact,
as the chart on the top right shows, gold
continues to show strength even as the dol-
lar shows uncharacteristic coincident
strength against a basket of developed mar-
ket currencies.

A prospectus for the above funds can be obtained through this website:
http://moneycentral.msn.com/investor/research/etfs.aspx or from your financial advisor.
 Page 6
L an e A ss et M an ag em ent
Momentum Watch
This section highlights various technical
measures of momentum. These measures
are not unique and vary depending on the
subject and time period. Past performance
should not be assumed to continue in the
future. That said, I use momentum indica-
tors to inform trading decisions and funda-
mental economic analysis to inform longer
term or secular views.
―Fundamental analysis
explains currency move- The comments below and the charts on the
ment in terms of macro- following pages were prepared as of the
economic variables such end of April. By the end of the first week in
as growth, inflation, May, the analysis appears to have been un-
monetary policy, etc. derstated in its prognosis.
One of the weaknesses
On the chart of the S&P 500 index on the
of fundamental analysis is
top of the next page:
that it says very little
 Long term momentum, as measured by
about the timing of
the 75– and 150-day exponential moving
moves and risk manage-
average (EMA), remains positive.
ment.
 The MACD (another indicator used to
Timing is an important
measure direction and strength of mo-
part of risk management.
mentum) is suggesting a course change
Even rudimentary techni-
as April comes to a close.
cal analysis can help in-
vestors fine-tune their  The resistance line at 1000 was pierced
entrance into an invest- last August and now forms a support to
ment and help quantify a potential correction. I’ve placed my
the risk. Monitoring the next resistance line at 1200, near the
price action itself will bottom end of the range of my 2010
likely reveal a higher year-end prediction of 1200-1300. That
probability of successful line seems to be holding for now.
opportunities….‖ The second chart shows comparable infor-
— Journal of Indexes mation for the MSCI Emerging Markets (EM)
index.
 The index broke through the 75-day
EMA in February but reversed itself
again in March while the longer term 150-
day EMA continues to hold on to an up-
ward trend.
 The MACD, which showed strength since
February, in a continuation of the pattern
from last month, is showing convincing
evidence of a correction.
 The resistance line at around 1040 con-
tinues to hold well.
These charts are showing clear signs of weak-
ness, especially in the MACD. While no sys-
tem is perfect and one can never be certain,
on account of the rapid advance since Febru-
ary combined with strong economic struc-
tural (long term) headwinds and sovereign
debt issues, I would say the risk is to the
downside and caution is advised, especially
for short term trading.
On page 8, longer term charts show a con-
tinuation of upward momentum for both the
S&P 500 and the EM index based on the EMA
but weakness is beginning to show on the
MACD.
Although not strictly a momentum indicator,
the bottom chart on page 8 shows the per-
centage of S&P 500 stocks above their 150-
day moving average. Throughout the second
half of last year, the percentage was at his-
toric highs — unsustainable based on prior
experience. While the pattern was broken in
February and again in early April, the ―danger
zone‖ was reached again toward the end of
April. Given the downside risk I see in the
other charts, the level of this indicator is not
exactly bullish and the yellow flag is out.
Page 7
L an e A ss et M an ag em ent
Momentum Watch (cont.)

A child of five would

understand this.
Send someone to
fetch a child of five.

— Groucho Marx

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 8
L an e A ss et M an ag em ent
Momentum Watch (cont.)

Democracy is a proc-
ess by which people
are free to choose the
man who will get the
blame.

— Laurence Peter

The S&P 500 and MSCI EM are unmanaged indexes which cannot be invested into directly. Past performance is no
guarantee of future results.
Page 9
L an e A ss et M an ag em ent
My Bottom Line
I accept the notion that the markets, broadly fer as austerity measures are put in place.
speaking, are moved by cyclical tailwinds and
A lesson I’ve learned in the last few months is
structural headwinds. The tailwinds of slow but
to also be mindful of opportunities to invest in
steady domestic economic recovery and improv-
U.S. equity sectors that have benefited from
ing corporate earnings plus the more rapidly
growing revenues and profits from interna-
improving economies in the emerging markets
tional sources, especially from the growth in
that have brought the markets forward since a
emerging economies. This point was brought
year ago March may now be running into the
home to me by observing that the emerging
larger reality of crushing sovereign debt in many
market index outperformed the S&P 500 in-
Exponential rapidly of the developed economies and the need to
dex by as much as 16% in the first half of the
rising or falling mar- subdue rising inflation in the emerging econo-
last 12 months, but has underperformed by
kets usually go further mies. Interestingly, the two listed headwind is-
nearly 6% in the last 6 months. Some of this
than you think, but sues lead to much the same intervention — ac-
may have been normal profit taking and some
they do not correct by tions, such as higher taxes and/or restrained
may have been a reflection of policy actions to
going sideways. lending, that will slow economic growth.
restrain emerging market inflation. Regard-
—Fourth Rule of Bob So what’s an investor to do? less, relative performance graphs proved to be
Farrell, investment the best way to identify this shift. (It will be
Of course, the answer to that depends on what
professional interesting to see how long this lasts once
kind of investor you are, specifically, how much
austerity measures mentioned above begin to
volatility (risk) you can accept within your in-
unfold.)
vestment time frame.
On a shorter term basis, technical analyses
As I’ve mentioned before, I use fundamental
are showing increasing weakness at the end of
analysis (economic developments and prospects)
April (and we know that things have got sud-
to guide my longer term planning and outlook
denly worse in the first week of May).
while I use technical analysis and relative per-
formance measures to guide my investment deci- Therefore, I continue to urge caution about
sions. Even there, time frames matter as differ- adding to new positions across the investment
ent trading signals occur at different frequencies. spectrum. Taking that weakness into account,
recent days have brought about a strong ad-
On a longer term basis, I continue to favor the
justment in certain prices (e.g. emerging mar-
emerging economies of Brazil and the Asia/
kets and very short term interest rates) that I
Pacific region along with technology, building
believe may only be a short term correction
materials and medical devices. High quality and
and may be a current buying opportunity.
short duration income producing investments
also remain attractive, especially with the recent Whenever considering a major commitment,
(probably only temporary) dip in short term ask yourself, would you rather be a late par-
yields. As sovereign debt issues become increas- ticipant to a rising market or an early partici-
ingly difficult to address, the markets in devel- pant to a falling one.
oped economies of Europe and the U.S. will suf-
Page 10
L an e A ss et M an ag em ent
Disclosures
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. In-
vesting 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 estab-
lished companies’ securities. The illiquidity of the small-cap market may adversely affect the
value of these investments.
Psychiatry enables us to
Investors should consider the investment objectives, risks, and charges and expenses of
correct our faults by
mutual funds and exchange-traded funds carefully for a full background on the possibility
confessing our parents’
that a more suitable securities transaction may exist. The prospectus contains this and
shortcomings.
other information. A prospectus for all funds is available from Lane Asset Management or
— Laurence Peter 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.

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
Lane Asset Management
P.O. Box 666
Stone Ridge, NY 12484
917-575-0299

Reprints and quotations are encouraged with attribution.

Page 11
L an e A ss et M an ag em ent
Disclosures
The charts and comments are only the author’s view of market activity and aren’t recom-
mendations 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 importance in providing the
viewer a comprehensive summary of market conditions for the featured period. Chart an-
notations aren’t predictive of any future market action rather they only demonstrate the
author’s 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 As-
set Management (LFM) considers to be reliable; however, LFM makes no representation as
to, or accepts any responsibility or liability for, the accuracy or completeness of the infor-
mation 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
Always borrow money
from a pessimist; he data. Investment recommendations may change and readers are urged to check with tax
doesn’t expect to be advisors before making any investment decisions. Opinions expressed in these reports may
paid back. 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
— Anonymous
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 based on hypothetical assumptions and is in-
tended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE
FUTURE RESULTS.