August 3, 2011

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Recap July was marked by lack of resolution on the U.S. debt ceiling, consumer confidence dropping to a 16-month low, the Case/Shiller home price index reaching a multi-year low and the

Silver bounced back strongly, ending the month up 14.5% while gold continued its YTD climb by adding another 8.4% for the month. Bonds continue to gain with Treasury bond rates falling during the month (see page 4) and the index gaining 1.3%.

time to come. Given the small margin in positive GDP, it wouldnt take much to dip negative in Q3 or Q4. Investment Outlook Last week I suggested remaining cautious (at the very least) and theres no reason to change that stance today, especially when taking lowered corporate guidance and lowered GDP estimates for Q3 into account, not to mention the uncertainty and ineffectiveness of Washington. Unless you can stand the volatility and are patient, I would be very careful about adding equity exposure at this point in time. My suggestions as we sit at the beginning of August are basically the same as last month:

If youve been following my saga the last several months about whether the technical signal of a downturn begun in late April was more than a normal correction or not, the market action during July and early August might suggest that perhaps I was right. While Im not ready to claim victory quite yet, the outlook is not good. As you know, our political leaders brought the U.S. to the brink of a technical default during July and, some say, that spooked the markets. I disagree. I dont think the markets were all that concerned about a downgrade, believing that the U.S. would not really default on its bills. Now that the debt ceiling debate is resolved, I think the real issue has become more clear reduced government spending in the next few years will weaken already weakening GDP growth. And the markets dont like that. Comments and suggestions are welcome. Ed Lane

Q2 GDP coming in at a paltry 1.3% gain with Q1 revised downward to a 0.4% gain. On the plus side, if you can call it that, Euroland has forestalled the Greek defaults a bit longer, new jobless claims werent quite as bad as expected and corporate earnings have been decent (though Q3 guidance is mixed).

Economic Outlook The economic outlook remains weak and, in my opinion, the reality will be weaker still as a result of increased cuts in government spending that are already showing up in state and local budgets. On top of that, our political leaders have done virtually nothing about jobs and, given the lead time when and if something is done, I think we face high unemployment and resulting economic weakness for some

The S&P roller-coastered to a 2.1% loss while emerging markets squeezed out a 1.1% gain. Oil followed the S&P but fared a bit better ending down almost 0.7%.

High quality, dividend paying common or preferred stocks High grade corporate and government bond funds, both domestic and, especially, global; also select high yield bond funds Gold (and silver for the bold among us) For taxable accounts, municipal bond funds have both attractive yields and the opportunity for capital appreciation.

This may be an especially good time to consider covered calls. The market has basically flatlined for the year and, best guess, 6 months from now may be not much different than it is today. Under those conditions, longer-dated covered calls will help soften a downturn and still allow a reasonable return if the market remains trendless or moves up.

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 is now stuck in a sideways trend around the support/resistance line at 1300. On a technical basis, the 75 and 150-day moving averages have turned slightly negative and the top (shorter term) MACD (another moving average-based momentum indicator), has resumed a negative outlook. The longer-term bottom MACD remains negative with a continuation of its downward slope. At this point, giving due regard to the economic and political challenges in the U.S. and other developed economies, it is difficult to be enthusiastic about the near term prospects for the S&P 500. Following the resolution of the U.S. debt ceiling issue, the in-

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dex broke through the 1300 resistance, not a positive sign as the next line of support is at 1200 and it wont take much to get there. The key for the coming month will be the reaction to the jobs report on August 5th. If negative, that could open up the index for a fall to 1200. If positive, we could revert back toward 1300. If the 75-day moving average crosses over the slower 150-day average as it is very close to doing, I would become decidedly more negative. Frankly, if we saw a pullback close to 1200, I would consider that a solid line of support and a potential buying opportunity. Until something positive shows up, I remain in the red light mode.

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
Morgan Stanley Emerging Market Index
Similar to the S&P 500, the MSCI Emerging Market Index continues to be range bound between 1050 and 1200, but is showing less weakness than the S&P 500. Meanwhile, the 75 and 150-day moving averages, which became positive during April, flat-lined again in May and have been declining slowly since. The top MACD graph below has been essentially flat (non-committal) since June while the longer term MACD in the bottom graph continues its drift south. The message from last month is unchanged: Given the generally positive fundamental long term outlook for emerging markets, this may be an opportunity to add to a position for more

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aggressive investors. On the other hand, the EM customer base in Europe and America is becoming increasingly strained suggesting more cautious investors may want to wait a bit longer for a confirmed move upwards. At this time, I think there are better places to invest and would not chase emerging markets unless combined with a covered call strategy.

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
Barclays Capital Global Bond Index
The Barclays Capital Global Bond Index represents the total return (capital gains and interest income) 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 have been a beneficiary of declining interest rates and decline in the value of the dollar,

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producing capital gains along with interest income. The index received a particularly strong boost in July and early August as investors, concerned about future austerity measures in the U.S. and Europe, sought safety in U.S.Treasury bonds. 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 would be appropriate. On a technical basis, the 75-day moving average continues to be very positive (and effective as a line of support over the charted period) while the MACD indicator is showing a little renewed strength. As it is, this could be a good place to park money peeled off the developed market sector. In that case, I would keep a sharp eye on interest rate movements from here.

The Barclays Capital BondGlobal 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
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 a generally 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 advanced as did the price of the precious metals. The inverse correlation is understandable as the metals can be

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seen as a safe 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 thats 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 again in April and May, the value of silver can be quite volatile and can contract rapidly. On the other hand, gold continues its more measured track upward. To me, gold continues to be the more attractive investment.

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
12-month Index Comparisons
The chart below shows the 12-month performance of selected indexes. Several observations can be made:

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A high degree of correlation continues to be seen among the equity indices in the U.S., Europe and emerging markets. Thus, there may be little to be gained from diversifying among these geographies on a technical basis alone. It seems European stocks may be catching on to the sovereign debt issues among the Club Med countries with the more rapid correction since May relative to the U.S. and emerging markets. There is a limit to how much rope investors will give a delay of what many people believe is inevitable a Greek partial default. After an initial spurt, emerging markets have gone essentially nowhere in the last 8 months. While oil still out ranks the other indexes for the period shown, it is also more volatile. Given its performance since last November and the economic stresses in the developed markets, I would be cautious about making a commitment to the oil sector. Global bonds continue to turn in a respectable performance with low volatility. After an initial dip in the period shown and despite the breather in May and June, gold has shown rather steady improvement.

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
The Almighty Dollar and Interest Rates
Here is an interesting chart. It shows the value of the dollar compared to a basket of currencies from developed economies. Not news perhaps, the dollar has been in a secular decline since about 2002. As it happens, 10-year Treasury bond rates were relatively stable until the current financial crisis when they dropped from a yield of about 4.5% at the end of 2007 to about 2.6% today. If you put these two things together, the result for a foreign investor in Treasury bonds is that the par value of the bond the in-

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vestor bought in 2007 with a yield of 4.5% has declined in real terms by about 12%. Not such a great deal. Moreover, unless the investor believes the dollar will stabilize or strengthen, she may become less inclined to buy those bonds in the future. Bearing in mind that a declining dollar is in Americas interest (it boosts exports and lowers the real cost of debt repayment), this would cause the demand for Treasuries to fall in the not-too-distant future. And this would cause rates to rise. Hence, the fear in investors hearts that a not-too-distant potential scenario out there could cause rates to rise and further depress economic domestic economic growth. Right now,Treasury bonds are in demand as a safe haven to a weakening economy. How long that will last is hard to say.

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
Technical Indicators
The following chart from stockcharts.com as of July 29th shows a variety of technical indicators of bullish and bearish outlook on a relatively short term basis. In brief, this chart shows the number of stocks on each exchange and the number of mutual funds that achieve a bullish or bearish signal according to the rule of the specific indicator. Stocks and funds can appear under more than one technical indicator. (Note that exchange-traded and closed-end funds are characterized as equities and are traded mainly on the NYSE, though some trade elsewhere.) The main takeaway from this chart today is the preponderance of equities and funds that are showing bearish technical signals, a reversal from the picture last month but probably a reflection of the activity in the last week of July (keep in mind this is a short-term observation).

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Past performance is no guarantee of future results.

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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. 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 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 transaction 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

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 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 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 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 data. Investment recommendations may change without notice and readers are urged to check with tax advisors before making any investment decisions. Opinions expressed 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 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 intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. 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