November 5, 2013

Economic and Market Recap

Are market valuation (PE ratios) stretched? I cant really say. On the one hand, the traditional and probably most watched measure, the twelvemonth trailing (TTM) average for the S&P 500 is around the top of its range over the last 100 years, but not nearly at the levels of the last two major market bubbles in 2000 and 2008. In fact, , when I look at the data, I found that the TTM PE is almost 10% lower than it was on January 2008 and slightly lower than it was on January 2010 even though the S&P has increased 70% since then. On the other hand, the cyclically-adjusted Shiller PE ratio is well above its 100-year average and well above its level in January 2008 as the market began its nosedive. As there are critics for both measures, my sense is its best to lean toward caution at this time.

L a n e A s s e t M a n age m e n t
Stock Market Commentary
end to the standoff on the debt ceiling, and President Obamas announcement of Janet Yellen as the next chair of the Fed drove the Dow up over 300 points in one day. With Washingtons nonsense out of the way, fundamentals took over for the rest of the month. By month end, according to Zacks Research, with over 70% of the S&P 500 reporting third quarter earnings, over 2/3rds of companies beat expectations on earnings and just over half had beaten on revenue (note that guidance was lowered over the last couple of quarters, making the beat easier, and continues to be downbeat). Even the delayed weak jobs report did no harm as the market read into it that QE tapering would be put off a little longer. Investment Outlook Again according to Zacks, earnings are on track to reach an all-time quarterly dollar record, to an expected 6% increase in 2013 and over 11% increase for 2014 (an interesting forecast in light of lowered guidance). My outlook remains cautiously optimistic with my longer term concerns at this point being a reaction to any new suggestion of QE tapering from the Fed or disappointing Q4 earnings. With no change from last month, as of this writing, there are still areas of relative outperformance, including:

Octobers equity performance was an interesting study in behavioral finance. Following Septembers nonchalance about the impending shutdown and debt default, market weakness in the first nine days of October sent a message to legislators that the shutdown was wearing thin and that the potential debt default was not going to be tolerated. Once Washington got the message, we saw a complete turnaround in the market as news came of an impending budget deal and likely

Healthcare, especially biotech Consumer discretionary and industrials Large cap value International developed markets, especially Europe (though I still favor the U.S.) Emerging markets (longer term) While returns are skimpy in comparison to recent years, short term high yield bonds and floating rate loan funds offer the best opportunity.

The charts on this and the following pages use exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly. The ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses for 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
S&P 500
Last month, I held onto my September view that equity risk remained to the downside as we entered October, but then said ...a settlement on the Federal budget could change things in an instant. Lo and behold, thats exactly what happened. And theres a lesson in that: when enough market pressure is applied to Washington (not voter pressure, unfortunately), Washington responds. Well see if this applies again in January when the next deadline is scheduled to take place.

Page 2

So, how does the market look now? Well, on the basis of the chart below, except for being a little overbought on a short term basis and susceptible to a correction of 3-5% or so (see the prior circled areas when price got beyond the 50-day MA), Id have to say that equities are looking pretty good with a rising trend line and improved momentum with the change in direction for the MACD. My larger concern from a technical perspective, however, is that the long-term trend is overbought (see next page). Therefore, I am going to maintain my cautious yellow-flag stance. Investors need to evaluate their tolerance for risk as the market plows ahead.

SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. 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
S&P 500 Trend
Below we have two pictures of trend in SPYs price. On the left, we have a shorter term, daily view with a spread from the top of the channel to the bottom of about 11.5%. Movement within this channel and in this perspective remains positive and, most recently, strengthening. This is seen in that a) the 50DMA slope is now increasing, b) we have a new high in the market, and c) the MACD has reversed course to the good.

Page 3

On the right, we have a longer term, weekly view with a spread from the top of the channel to the bottom of about 17%. In this view, SPY is near the top of the channel for the 6th or 7th time in over 4 years (depending on how you count), with 2 out of 6 of the prior times resulting in a significant correction to the bottom of the channel. What concerns me is a possible repeat of the experience of the Spring of 2011. If looking at only this chart, there is good reason to keep exposure to equities below ones long term strategic allocation. Since SPY has reached back to the top of the channel without an intervening correction, it may be a particularly good time to take some equity exposure off the table to await a better buying opportunity.

SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. 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.)
International equities, represented here by VEU, are continuing to show characteristic volatility with a rapid recovery from the breakdown that occurred in June and again in August. With the recovery that occurred in early September and again since Washington dodged the debt ceiling failure, price broke through resistance around $48.10 and now appears to have retested that barrier. At this stage, $48.10 has become a new line of support.

Page 4

As Ive mentioned in the past, international performance can be very localized. Currently, the Euro Zone and developed marke ts generally have been outperforming the broader index. Emerging markets showed a little leg in September, but have since settled down to be an average performer. While I have become more optimistic on international equities, particularly in Europe, my preference to add exposure slowly in light of recent volatility has paid off (see next page).

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

Page 5

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 (IGC) bond index (LQD) on the left, and to the Vanguard Allworld (ex U.S.) index fund (VEU) on the right. While the relative weakness in August for equities vs. IGC bonds returned in September, now that the debt crisis is behind us, the trend of the relationship favoring equities has strengthened, as expected. On the right, while international equities extended their relative outperformance to domestic equities in September, the pattern seems to have been broken last month, lasting for less time than I thought would be the case. As I indicated last month, the deepness of the MACD at the time suggested an overbought situation for international and that was borne out in October. While we still have a trend line favoring international, that relative price has pierced the trend line to the upside and momentum (the MACD) has begun to reverse giving the greater weight to domestic equities at this time.

SPY, VEU, and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends), the FTSE All-world (ex US) index, and the iBoxx Investment Grade Corporate Bond Index, respectively. Their 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
Income Investing
While income investing has gotten a bad name in the last few months as the reaction to the Feds contemplation of tapering its bond purchase program in May resulted in a spike in interest rates, that does not mean the sector should be abandoned altogether. In prior months, I spoke of the outperformance of preferred stocks to investment grade corporate bonds. This month as I did last month, I draw

Page 6

attention to short term high yield corporate bonds represented here by PIMCOs exchange -traded fund HYS. On the left below is a 2-year chart of total return for HYS. While the 2-year return is an impressive 10% annualized, note that for the latest 12 months the total return has declined to a still respectable 7.5%. The chart on the right below contains the relative performance for HYS vs. investment grade corporate bonds (LQD) showing their similarity of performance during a period when LQD was rising, but significant outperformance since the first of the year as LQD has faltered. With the recent decline in interest rates, the relationship flattened in October. While it looks like it is about to reverse in favor of LQD, I dont expect that to happen as HYS has a greater current yield and I doubt well see much more interest rate decline.

HYS is the PIMCO 0-5 Year High Yield Corporate Bond Index which seeks to correspond to The BofA Merrill Lynch 0-5 Year US High Yield Constrained IndexSM*. 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
Treasury Rates

Page 7

This chart shows the percentage increase in 1, 5, and 10-year Treasury rates since the beginning of the year. In percentage terms, rates skyrocketed in August and the first week in September with the 1 and 5-year rates increasing over 20% during the period while the 10-year increased nearly 10%. Since then, as a result of the non-tapering event in September, the 5-year rate lost about a third of the increase it achieved since May while the 10-year rate, which hadnt spiked quite so far, also lost ground (and is now just shy of 2.65% and basically unchanged for the month). While its a little to o early to be sure, the end of October increase in the 5 and 10-year rates once the resolution of the debt ceiling crisis settled in could be an indication that any significant decline in rates is less likely. Longer term, the outlook remains for higher rates the only question being when. Accordingly, investments in income-oriented securities should keep durations short, under 5 years.

L a n e A s s e t M a n age m e n t
12-Month Performance
The chart below shows the last 12-month performance of the indicated ETFs, the same ones that are on page 1.

Page 8

Large cap domestic equities (SPY) plowed ahead in October with the rolling 12-month gain increasing nearly 10 percentage points to a whopping 27.5% as I suggested might happen last month with the roll-off of earlier weak returns. Next month may be even better as year-ago weakness is eliminated. As with the U.S., the Euro Zone (EZU) eliminated earlier weakness in the chart and, along with a good October on strong fundamentals, is up nearly 32% for the running 12 month period. Note that the broader international index (VEU, not shown) remains below SPY for the 12 months, highlighting the outperformance of EZU vs. VEU by over 10 percentage points for the period. Gold (GLD) continues to languish. At this stage, as far as I can tell, golds future is anyones guess. Oil (DBO) lost a little altitude in October. I expect future gains will be modest, at best, as the worlds economies continue to slowly recover and tensions ease in the Mideast. Emerging market equities (EEM) took a breather in October following a strong month in September. On a longer term basis, EEM has the most to gain, but needs to see some improvement in momentum which continues to be lacking. Investment grade corporate bonds (LQD) gained a little ground in October as interest rates eased, but remains flat on a total return basis for the last 5 months and uninspiring overall.

Page 9

L an e A ss et M an ag em ent
Disclosures Edward Lane is a CERTIFIED FINANCIAL PLANNER. 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, CFP Lane Asset Management Kingston, NY Reprints and quotations are encouraged with attribution.