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March 9, 2011

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Recap Treasury bond rates were also unchanged Investment Outlook
Apologies for being a little late this month with (rising then falling with a renewal of money Following almost straight up performance since
my commentary. I’ll try to keep this brief. flow into bonds). last September, not only is the market due for
If it’s not too late to go over the market ex-  It was a strong month for precious metals a correction, but economic headwinds and geo-
perience in February, here is a brief recap and commodities as gold and oil increased political challenges in the Mideast and else-
(also, see the chart below): over 5% and silver put in another spectacu- where present a difficult outlook for most in-
lar performance, gaining over 20% for the vestment sectors. Accordingly, I recommend
 The S&P 500 continued its march upward
While I would not sug- month. heightened caution for risk-taking.
begun last September until it hit a speed
gest we are about to ex-
bump with the crisis in Libya in the last Economic Outlook On the plus side, I would focus on the highest
perience a second reces-
week of the month. The index ended up Despite improving consumer confidence and quality dividend-paying equities and sectors
sion, and while I do rec-
ognize the improvement 3.2% for the month. manufacturing indices, the economic outlook that will benefit from global tensions, flight to
that has been occurring  Emerging markets basically tread water in the U.S. continues to look challenged on the quality, and weakening currencies, such as en-
in corporate profits and ending down 1% for the month. Weakness larger issues of unemployment and housing. I ergy and other commodities, precious metals
revenues, I believe the continues as many emerging market coun- fear an even larger train coming down the and securities that benefit from rising interest
risks to the market are rates. Even here, I would be mindful of the po-
tries are fighting inflation with fiscal and track with layoffs at state and local levels,
overwhelmingly to the tential for profit-taking as many of these areas
monetary tightening. budget reductions at the federal level, increas-
downside. have run up in price.
ing gas prices and the wind down of QE2, not
 The global bond index was unchanged for
This would be a good to mention austerity measures in Europe and
the month reflecting the fact that 10-year For the more conservative investor, I would be
time to avoid taking on
inflation in Latin America and Asia. raising cash and examining option strategies
additional investment
that will help control downside risk.
risk. More conservative
investors should consider For taxable portfolios, I would also give consid-
raising cash levels, eration to a well-diversified municipal bond
though I would do so in a portfolio. State and local governments are in
measured way as long as the midst of dealing with large budgetary is-
the underlying perform-
sues. Unlike the Federal government, however,
ance trend remains posi-
they can’t print money or operate at a deficit.
tive.
While defaults may increase, I suspect this issue
As always, I welcome
is overblown and the local governments will
your comments and sug-
work their way out of the problem over time
gestions.
even if they have to do painful cuts along the
— Ed Lane
way. With current tax free yields at 4% or
more, and with bond prices depressed, an allo-
cation to municipal bonds may prove timely.
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 strongly 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 overheat-
ing, economies in the emerging markets, it is difficult to be convinced about the sustainability of the current uptrend in the S&P 500. The
caution light is out and any additional exposure to U.S. equities should be entered into slowly and carefully with the understanding that a pull-
back of 10-20% or so would be consistent with the pattern established over the last 18 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 have now flattened out 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. I think performance over
the next couple of weeks will be telling for a longer term commitment and we may now be looking at a ―basing period‖ for the next move up.
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 in the U.S., Europe and, to a lessor extent, in the
emerging markets.
 While performance of the S&P 500 has lagged emerging markets for the last 12 months, the gap is now essentially closed.
 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 is just shy of gold
for 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 evaporated over the last 4
months.

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
Lane Asset Management is a Registered Investment Advisor with the
market action rather they only demonstrate the author’s opinion as to a range of pos-
States of NY, CT and NJ. Advisory services are only offered to clients
sibilities going forward. All material presented herein is believed to be reliable but its
or prospective clients where Lane Asset Management and its represen-
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tatives are properly licensed or exempted.
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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-
tional and emerging markets may entail additional risks such as currency ance upon the data. Some results are derived using historical estimations from available
fluctuation and political instability. Investing in small-cap stocks includes data. Investment recommendations may change without notice and readers are urged
specific risks such as greater volatility and potentially less liquidity. to check with tax advisors before making any investment decisions. Opinions ex-
Small-cap stocks may be subject to higher degree of risk than more es- pressed in these reports may change without prior notice. This memorandum is based
tablished companies’ securities. The illiquidity of the small-cap market on information available to the public. No representation is made that it is accurate or
may adversely affect the value of these investments. 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
Investors should consider the investment objectives, risks, and charges
and expenses of mutual funds and exchange-traded funds carefully for a 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-
full background on the possibility that a more suitable securities trans-
port relates, either directly or indirectly, may fall or rise against the interest of inves-
action may exist. The prospectus contains this and other information. A
tors. All prices and yields contained in this report are subject to change without notice.
prospectus for all funds is available from Lane Asset Management or
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
Edward.Lane@LaneAssetManagement.com
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
The charts and comments are only the author’s view of market activity Lane Asset Management
and aren’t recommendations to buy or sell any security. Market sectors P.O. Box 666
Stone Ridge, NY 12484

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