December 7, 2011

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Recap A Tarzan market, swinging this way and that, is what one analyst called the recent market and it certainly rings true for the last six months, especially the last four. So, what does it all mean? In my book, investors are afraid, and with good reason. Theyd like to believe the markets recovery between, say, March 2009 and May, 2011 (over 85% increase in the S&P 500 during that period) represents a reliable indication of potential growth to come and would even be satisfied to accept somewhat less. Then along comes increasingly dire predictions of a financial calamity in Europe with global implications and the market turns from the long view to one that is

headline driven.

Gold (GLD) wavered throughout the month again, and closed up a bit less than 2% (and over 22% for the year). The aggregate bond index fund (AGG) had little change for the month, retaining its 6% return for the year so far (interestingly, the investment grade corporate bond index fund (LQD, not shown) reversed its prior month extraordinary gain of 2.5% and then some, and is now even with AGG at about 6% for the year so far). U.S. Treasury bond rates also swung wildly, losing 20 b.p. earlier in the month, then recovering more than half that to close at just under 2.1%. _____________________ (cont.)

After falling over 7% in the first 27 days of the month, the S&P 500 (SPY) recovered nearly the full amount to end just slightly down for the month and closing just under 1% increase for the year-to-date. Emerging markets (EEM) and Europe (IEV) were even more volatile in November losing roughly 12% and 13% before recovering to close down only (sic) 2% and 3%, respectively, for the month (though they are still down over 15% and 10% for the year, respectively). Oil (DBO) continued its winning ways, adding about 9% for the month, but it is still up less than 2% for the year.

Well, in case you havent noticed, its all Euro, all the time. The European debt issues have been a top story in the press and this has a great many people worried. While its impossible to attribute market performance to just one issue no matter how big, its likely that the Euro crisis has taken a toll on the worlds equity markets. But heres what I find curious. The S&P 500 is basically flat for the year. If a collapse of the Euro has the potential to create another financial disaster, shouldnt the market be anticipating this more than it seems to be? So, either the market doesnt think the crisis will get that far or, what is also possible, the market doesnt believe the impact will be as great as advertised. Stay tuned. Comments welcome. Ed Lane

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.

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Economic Outlook While there is some evidence of green shoots, the economic environment remains weak. With the exception of a lot of activity surrounding the European debt crisis, little has changed since last month. Here are the factors that concern me the most (in no special order):

the value of the debt through inflation (printing money, like QE) and/or restructuring; implement sufficient austerity measures to allow debtor nations pay down their debts; and/or grow economies faster than debt growth. Unfortunately, for political and practical reasons, none of these solutions represent a near term fix (if a fix at all) and the bond markets and rating agencies are visibly reaching the end of their patience. That said, I think the political and investment community pressures are such that we will eventually inch forward to some sort of a positive outcome, but it wont happen overnight and may not happen soon.

now that I expect slow but positive growth as the world continues to deal with its debt overhang. All bets are off if the Euro fails or war or a major terrorist attack hits somewhere in the world, heaven forbid. Investment Outlook If not shaken by an extraordinary event, the stock market moves with corporate earnings. In fact, earnings have been decent so far in 2011 but are now looking like they will go out like a lamb in Q4. In fact, the sources for those earlier profits/EPS improvements workforce reductions, exports, foreign sales and stock buybacks all look like they are reaching the limit of their usefulness. On a purely technical basis,, while leaning positive, there is not a whole lot of support for great confidence in equities other than their relative performance to bonds (see pg. 7). Therefore, Im going to stick to nearly the same recommendations made last month (dropping bonds for now):

Housing: The Case/Shiller index of home prices dropped 0.6% in the most recent report (for September) and prices remain about 3.6% below year-ago levels. Small improvements have occurred in the number of new and existing home sales, but not enough to be meaningful. Employment: November job data announced at the beginning of December was 120,000 non-farm payroll jobs vs. 125,000 expected. Prior months figures were revised upward from 80,000 to 100,000 for October and from 158,000 to 210,000 for September. The unemployment rate decreased from 9% to 8.6%. These figures are certainly to be appreciated, but they are not nearly the stuff of which a recovery is made. European debt: This crisis was the driver of nearly all market action during November with off-again, onagain reports of crisis mitigation or resolution. In the end of the day, it does seem like we are getting closer to a plan to save the Euro, though any agreed plan will take time to implement, if it survives at all. At stake is the fate of the Euro and financial stability in the Eurozone brought on by excessive and unsustainable sovereign and bank debt. From what I can tell, there are few avenues out of the debt predicament, alone or in some combination: achieve funding from the ECB and/ or the IMF sufficient to support the debt and keep interest rates from creating a solvency crisis; decrease

American debt: November wasnt a such a good month for the U.S. either, as the so-called Super Committee, charged with coming up with a plan by Thanksgiving to reduce the deficit over the next ten years, disbanded without reaching an agreement. While this may have contributed to some of the markets decline prior to Thanksgiving, the subsequent recovery (apparently a result of potentially positive news coming from Europe) tells me the market either is not all that concerned about U.S. debt and deficit levels or believes the problem will be handled soon, perhaps as an outcome of the presidential election next year. Political gridlock: Evidence continues to be absent for a break in the political gridlock in Washington. Far from it. And now we have to look forward to whether Washington will be able to extend the payroll and other tax breaks into next year in order to help keep growth to at least a non-recessionary level.

High quality, dividend paying common or preferred domestic stocks 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 For taxable accounts, municipal bond funds.

Keep in mind that these recommendations are based on a point in time and are subject to change with changing data. Investors need to be prepared for continuing volatility.

I have low expectations for the economic outlook over the next several years and will say more about this in my Fearless Forecast for 2012 in January. Suffice it to say for

L a n e A s s e t M a n age m e n t
S&P 500
Since September 2010, the S&P has been unable to get out of the trading range of roughly 1125 to 1350 (112.5 to 135 for SPY, the ETF that reflects the S&P 500). More recently, the S&P has been trading in the range of roughly 1125 to 1250/1275. Since the essence of technical analysis is to identify a trend or pattern that can be expected to perform in a reliably predictable way, what we have over the last 14 months is a range bound S&P, and an even more narrow range in the last 4 months. Since the moving averages are not now showing a clear trend, my analysis for the S&P is that trading will remain in the narrow band of 1125 to 1275 until the market feels comfortable that the economic crisis primarily the one in Europe has been effectively addressed (a sustained breakout above 1275) or not (a sustained breakout below 1125).

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Accordingly, I advise caution in terms of any substantial commitment to owning equities along with an awareness of the volatility that has been with us for the last 4 months and shows no sign yet of abating. For short term traders, I would consider adding risk as the S&P gets closer to the bottom of the range (1125) and shedding risk as it gets closer to the top (1275), which is not too far from where we are at today at the beginning of December. For longer term traders, I would have cautious optimism on the basis of having a likely floor to the S&P around 1125 along with the (hopefully effective) political pressure to resolve the European (and U.S.) debt crisis in coming months.

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.

L a n e A s s e t M a n age m e n t
All-world (ex U.S.)
For the entire two-year period shown, the Vanguard All-world index ETF, VEU, has traded in the range of 38-50 while having little net change over the entire period. Currently,VEU appears to be range bound between 38 and 45, almost surely as a result of the uncertainty surrounding the European debt crisis. Unlike the chart for SPY, however, the moving average trend lines are showing a negative tilt (the MACD analysis has less discernible direction). Therefore, as with SPY, I would lessen exposure when VEU gets closer to the top of its range (45) and add exposure as VEU gets closer to the bottom (38) until a more clear pattern emerges in the moving averages, especially in the MACD analysis. I would continue to avoid any substantial commitment to international stocks until there is more clarity in the macroeconomic outlook.

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My overall sense is that the market is not only trying to assess whether the Euro crisis will be addressed effectively, but also what the longer term implications will be. For example, if the EU is able to convince markets that the debt crisis will be managed and the Euro will remain intact, what will that mean for business conditions in Europe? Will it mean greater austerity leading to slower growth and possibly a recession, or will it mean new growth-oriented initiatives. I think the latter is less likely, but time will tell.

VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. 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
U.S. Aggregate and Corporate Bonds
AGG represents the total return (capital gains and interest income) of a composite of domestic government and investment grade corporate bonds and similar instruments. LQD represents the total return for investment grade corporate bonds alone. Note the initial dip followed by flatness of the performance in late 2010 / early 2011. This corresponds to an increase in interest rates at the time. For November, AGG remained basically flat after an initial spike while LQD experi-

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enced a sharp reversal of its gain of the prior month. Since Treasury rates remained relatively flat in November, I believe that LQDs performance was caused primarily by a technical correction of the outsized gain in October. The more interesting analysis we can make from these charts is that there appears to be an emerging reversal in the uptrend. This shows in the MACD for AGG and the moving average trend line for LQD. Since this could be a harbinger of higher interest rates to come (or, at least a concern about higher rates), I would avoid adding exposure to corporate and government bonds for the time being. Eventually, in my opinion, we will be seeing those higher rates whether this is that time or not. See also page 7 for an analysis of relative performance of bonds and equities.

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.

L a n e A s s e t M a n age m e n t
12-month Sector Comparisons
The chart below shows the 12-month performance of selected exchange-traded funds representing various market segments. Several observations can be made:

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U.S. equities continue to outperform international. The divergence between the U.S. and international markets may be giving an indication of an opportunity with the international markets as markets tend to normalize over time. However, as stated earlier, I believe the safest course remains with overweighting U.S. equities at the present time. See also page 7 for relative performance of U.S. and international equities. Emerging markets are running parallel to Europe and behind U.S. equities, probably reflecting concern about their export markets. Oil departed from its correlation to the equity markets and is showing some strength. While a recession will dampen demand, expanding emerging markets will push prices higher. Its not yet clear to me which influence will be the greater in the short term while the longer term outcome is likely to drive energy prices higher. Gold appears to have recovered from its swoon in September and is now back into its longer term upward trend.

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
Asset Allocation and Relative Performance
Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. Commonly, investors

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choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually or when the actual percentage allocation deviates from the longer-term strategic plan. One useful tool Ive found for establishing and revising asset allocation 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 investment grade corporate bond index (LQD) on the left, and SPY to a Vanguard allworld (ex U.S.) index (VEU) on the right. On the left, we can see that the S&P 500 began outperforming bonds in October, although it was touch-and-go there for a while. While we are still in the early stages of this relative performance, support remains to increase exposure to equities relative to bonds. On the right, we see the S&P 500 continuing to outperform the international index, a pattern that arguably began a year ago. Note the bottom technical indicators have now become consistent with the moving average, reinforcing the view toward overweighting domestic equities.

SPY, VEU, and LQD 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.

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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