February 2010
L a n e F i n a n c i a l M a n ag e m e n t
Special points of interest:
 The market sold off in
January. Is this tempo-
rary or a new normal?
 Q4 2009 GDP growth
was 5.7% but there was
less here than meets
the eye.
 Market momentum
may be shifting to the
downside.
 Investment focus
should be on emerging
markets and income.
Inside this issue:
What Moves Markets 1
At-a-Glance 2 The S&P rose at an annualized rate of
Economic Recap 3 over 26%
Market Recap 4-5
Momentum Watch 6-8
My Bottom Line 9 of never-ending productivity gains col-
Disclosures 10-11
Stock Market Commentary .. by Ed Lane
What Moves Markets?
The value of stock and bond markets is es-
sentially the value investors put on the ex-
pected returns of dividends/interest and the
future value of the underlying investment.
Since this total return on investment is an
unknown quantity, investors anticipate, or
have expectations of, what the future values
will be. (Short term traders have other mo-
tives.)
While, at any point in time, the value of a
market reflects the expected returns, mar-
ket movement results from some combina-
tion of two factors:
 A change in those expectations, and/or
 Fear or greed that a market has moved
in one direction or the other too far,
too fast.
Looking back to the two most recent major
market cycles for the S&P 500 (1995-2003
and 2003-2010), here’s what I observe:
 From 1995 to around the middle of
2000, investors saw an explosion in
technology, especially use of the inter-
net, and resulting productivity gains.
 Then, in 2000, investors began to see
that many internet-related businesses
had no staying power and expectations
lapsed. Along with it, the S&P fell at an
annualized rate of 28%
 Then, around 2002-2003, the effects of
easy credit
began to
show up as
consumers
bought eve-
rything in sight
at increasingly higher prices. The S&P
rose nearly 14% annualized
 In late 2007, reality set in that asset
prices had gotten overextended and
credit was made available to many who
could not repay. The S&P fell nearly 70%
annualized
 Last March, investors came to the conclu-
sion that the recession’s impact on the
market was too extreme and government
stimulus was on the way. A sharp cor-
rection ensued as the S&P rose at a 75%
annual rate (producing a 6.4% annual re-
turn for the entire 15-year period).
So, where does that leave us? Sensing that
each of the last 15 years of major market
swings in the S&P resulted from an unrealistic
view of the underlying real value of the econ-
omy, we are now left to discern what that
value really is — and put a price on it. How-
ever, we are now in a period of great eco-
nomic uncertainty. As a result, the market is
volatile, reacting quickly to news (and advice)
that goes one way or the other — and
there’s plenty of it.
There are many implications for investors,
some of which I will try to address in ―My
Bottom Line‖ on page 9.
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L an e F in anc i a l M ana ge me nt
At-a-Glance
Here is a quick summary of this month’s
market commentary:
The Economy
Despite improved corporate earnings re-
ports during the month, economic signals for
January were not encouraging. Employment
and credit, my two primary bellwethers, re-
mained weak. The GDP annualized gain of
I believe we are on an 5.7% in the last quarter of 2009 turned out
irreversible trend to- to be based on seemingly unsustainable fac-
ward more freedom tors.
and democracy - but
The Market
that could change.
The market took a decidedly negative turn in
— Dan Quayle the middle of January. Momentum indicators
are barely hanging on to their preceding up-
ward direction.
The Current Opportunities
Despite a sharp sell-off in emerging markets
and building materials, I believe the eventual
outperformance of the emerging market
economies will prove that these areas rep-
resent the best investment opportunities for
both equities and income-oriented invest-
ments. Technology and certain areas of
health care along with consistent dividend-
paying sectors (like utilities) and preferred
stocks will also do well.
My Bottom Line
The U.S. economy, and that of many, if not
most, other developed nations, face a nearly
impossible situation with rising domestic
deficits and low cost employment competi-
tion from emerging market economies (the
solution to one exacerbates the other).
While those domestic businesses/sectors
that are successful selling into or competing
with the emerging markets will do relatively
well, those that depend on domestic con-
sumption will be severely challenged.
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L an e F in anc i a l M ana ge me nt
Economic Recap
The year started off with few sightings of
green shoots. Much of the economic news
was less than cheerful:
 Consumer credit in the U.S. dropped a
record $17.5 billion in November as un-
employment, close to a 26-year high, dis-
couraged borrowing and banks limited
access to loans. Fed policy makers have
said tighter bank lending standards and
reductions in credit lines are hampering
the recovery. The series of 10 straight
declines in consumer credit was the long-
est since record-keeping began in 1943.
Isn't it strange? The same
rate in the period 2001-2007), it would
take another seven years for the U.S.
unemployment rate to return to 5%.
(As things have gotten worse since then,
you be the judge as to how soon this
will be happening.)
 The so-called ―misery index‖ (the sum
of the unemployment rate and the an-
nual change in the CPI calculated by
Haver Analytics) increased to its highest
level in twenty-five years.
 The big news was the fourth quarter
5.7% annualized rate of improvement in

people who laugh at  Employers shed 85,000 jobs in December
gypsy fortune tellers take
economists seriously.
— Anon.
 Over 7 million jobs have been lost since
as the unemployment rate rose in 43 out
of 50 states. Federal Open Market Com-
mittee (FOMC) meeting minutes from
December highlighted a concern that
hiring activity remains slow, especially in
the small business sector (the usual
source for employment growth). The
unemployment rate stayed at 10% in De-
cember but it did so for a very bad rea-
son. It was because the labor force
plunged 661,000 in what was the sharp-
est decline in nearly 15 years. Without
that dramatic disengagement from the
jobs market on the part of the general
public, the unemployment rate would
have spiked to 10.4%.
late 2007, probably more. According to
Rutgers University economist Joseph Se-
neca in Wall Street Journal article from
last October, if the economy returned to
the pace of job growth in the 1990’s
(about 180,000 jobs/month or twice the
the GDP. At first, this looked like great
news as the rate of increase exceeded
most expectations. Then, as the com-
ponent numbers received scrutiny, it
turned out there was less there than
met the eye. The largest source of gain
(3.7%) was from a rebuilding of invento-
ries as decumulation had occurred in
prior quarters. If sales don’t improve
— and domestic demand growth slowed
in the fourth quarter — that source of
GDP gain will soon disappear. While I
don’t have the recent impact of govern-
ment stimulus spending, it was a little
less than 2% in the third quarter. I as-
sume it had to account for something
like that in the fourth. The net result is
that this pace of growth looks unsus-
tainable.
Why oh why as reported by Bloomberg, did
Bruce Kasman, chief economist of JPMorgan
Chase, say as a result of the GDP announce-
ment: ―We are getting on to something that
is pretty sustainable….‖ What am I missing?
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L an e F in anc i a l M ana ge me nt

Market Recap

In the chart below, we see the twelve- perspective, since the current ―bull‖ market
month performance of several exchange- began last March, not counting the current
traded and closed-end funds representing decline, the S&P 500 index has gone through
selected investment sectors. three corrections and the emerging markets
(EM) index has gone through four, for aver-
As I have reported in the past, there were
age declines of 6.1% and 7.2%, respectively.
signs last June, August and again in October
The current decline from the January peak to
that the market was either overextended or
month-end for the indices was 6.6% and 8.5%
taking a breather. Well, as shown on the
for the S&P and EM, respectively. Then
chart to the right, it happened again in Janu-
The economy depends again, it might not be over.
ary. There was a suggestion this was com-
about as much on
ing in December as momentum indicators
economists as the
were weakening and price advancement was
weather does on
stalling. Yet, that had happened several
weather forecasters.
times before only to see the momentum
– Anon. restored within a few weeks.

The second half of January was painful as

virtually all equity markets took a simultane-
ous nosedive. However, putting things in

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Page 5
L an e F in anc i a l M ana ge me nt
Market Recap (cont.)
Looking at selected bellwethers represented cent beginnings of monetary tightening as the
by ETFs in the 12 month and January charts Fed indicated it would not extend its mort-
below, the pattern is the same as for the gage backed securities purchases beyond its
regions on the prior page. Basic materials current authorization — unless mortgage
and technology took the hardest hit reflect- rates started to rise.
ing, in my opinion, their preceding outper-
formance and concerns that economic
brakes are being applied in the emerging
markets.
In economics, the ma-
Gold, on the other hand, didn’t suffer quite
jority is always wrong.
so much, having already adjusted in Decem-
— John Kenneth ber. Interestingly, the not-so-perfect in-
Galbraith verse relationship between gold and the 10-
year Treasury bond yield failed to be perfect
in January as both values declined. In the
case of the bond yield, the FOMC reiterated
its intent to keep interest rates low; in the
case of gold, I suspect the decline was due
to heightened focus on the deficit and nas-

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 F in anc i a l M ana ge me nt
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
―Fundamental analysis term or secular views.
explains currency move-
On the chart of the S&P 500 index on the
ment in terms of macro-
top of the next page:
economic variables such
as growth, inflation,  Momentum, as measured by 75- and
monetary policy, etc. 150-day exponential moving averages
One of the weaknesses (EMA), remains positive. That said, the
of fundamental analysis is daily price plunged below the 75-day
that it says very little EMA and was approaching the 150 day
about the timing of average as the month ended, not a good
moves and risk manage- sign.
ment.  The MACD (another indicator used to
Timing is an important measure direction and strength of mo-
part of risk management. mentum) began to change course at the
Even rudimentary techni- beginning of October and has now taken
cal analysis can help in- a sharp dip in January.
vestors fine-tune their  The resistance line at 1000 has been
entrance into an invest- handily exceeded and now forms a sup-
ment and help quantify port to a potential correction. I’ve
the risk. Monitoring the placed my next resistance line at 1200,
price action itself will near the bottom end of the range of my
likely reveal a higher year-end prediction of 1200-1300.
probability of successful
The second chart shows comparable infor-
opportunities….‖
mation for the MSCI Emerging Markets in-
— Journal of Indexes dex.
 The 75– and 150-day EMAs remain posi-
tively sloped, though not as aggressively
so as the S&P 500.
 The MACD turned bearish around the
beginning of November and took a sharp
dip in January similar to the one taken last
October.
 The seemingly decisive break above the
resistance line at around 950 failed to
hold in January.
On the basis of these two charts, the best
news remains that the slopes of the EMA’s
remain positive. If they were to turn nega-
tive, I’d have to say that the momentum had
shifted to the downside.
On the top of page 8, another chart shows a
14-year weekly value of the S&P 500 index
along with a 50-week EMA and the MACD.
Notice how well future price direction is
―predicted‖ by crossovers of the price and
the EMA line once the slope of the EMA
changed.
At the bottom of page 8 we see a comparable
chart for the MSCI Emerging Markets index.
This chart shows the greater volatility of the
EM index with otherwise similar results.
While it’s true that a substantial portion of
the advance since last March would have been
missed had one followed the EMA indicator,
it is also true the decline from the beginning
of 2008 would have been avoided for more
than a net positive result. Following the
MACD at extremes would have also given a
very favorable result, although there was
greater potential for false starts.
Page 7
L an e F in anc i a l M ana ge me nt
Momentum Watch (cont.)

Human beings are the

only creatures that
allow their children
to come back home.

— Bill Cosby

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.
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L an e F in anc i a l M ana ge me nt
Momentum Watch (cont.)

Bureaucracy defends
the status quo long
past the time when
the quo has lost its
status.

— Laurence J. 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 F in anc i a l M ana ge me nt
My Bottom Line
We hardly got out of the gate in 2010 before to establish a new base of employment to ab-
what I saw as an inevitable correction sorb the millions who have lost jobs.
(admittedly, I’ve been predicting this for some
President Obama’s State of the Union speech
time) sent investors scurrying for safer ground.
gave another clue as to the seriousness of the
But is this a temporary adjustment or a more
problem: the reference to expanding exports
lasting one to establish the ―new normal?‖
was a nod, I think, to the understanding that
While the next few weeks will help answer this the U.S. consumer will be restrained for many
question (February has certainly not gotten off years to come.
to a favorable start), my suspicion is that the
The older I grow the In my mind, the best opportunity to restore
answer will depend on which markets we are
more I distrust the jobs and domestic demand will be for the U.S.
talking about. For the U.S., the headwinds of
familiar doctrine that to embrace a full-throated approach to energy
continuing unemployment and future deficit re-
age brings wisdom. self-sufficiency and infrastructure revitaliza-
duction that will put further strains on the econ-
tion. Given the long lead times, some form of
— H.L. Mencken omy are formidable. For emerging markets and
continuing stimulus will be required to achieve
those businesses that serve them, I think the
any level of decline in unemployment. With
recent correction (brought about by steps taken
the current political climate and concerns
in those economies to moderate their own ex-
over the growing deficit, it is difficult to be
plosive growth and concerns about sovereign
very optimistic in the short run.
debt default) will turn into only a temporary ad-
justment. All that said, opportunities for investing re-
main. Fact is, a global rebalancing of econo-
Here’s my continuing concern (familiar to my
mies is taking place. On account of lower
regular readers): The U.S. is transitioning to a
cost of labor, wealth of natural resources, bet-
new reality. In the 1980’s, economic and market
ter management of sovereign debt and, it
expansion came from U.S.-led manufacturing; in
seems so far, generally more effective govern-
the 1990’s, expansion came as a result of growth
ment in dealing with the financial crisis and
in productivity and the technology bubble; and in
economic expansion, I believe the best oppor-
the 2000’s, expansion came as a result of unbri-
tunities for equity and income-oriented invest-
dled credit expansion.
ment will be within emerging markets and the
Where will expansion come from in this decade? businesses that serve those markets, such as
For the U.S., the answer is far from clear. As building materials.
traditional manufacturing continues to move to
That’s not to say that there won’t be invest-
lower cost emerging economies and the financial
ment opportunities in other sectors. Certain
sector becomes more tightly regulated, with the
areas of health care (like medical devices) and
financial strains on state and local governments,
technology will do relatively well along with
with the coming explosion of Medicare, Medicaid
consistent dividend-paying equities, like utili-
and Social Security, and with the inevitable wind-
ties and preferred stocks.
ing down of government stimulus, the U.S. needs
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L an e F in anc i a l M ana ge me nt
Disclosures
Lane Financial Management is a Registered Investment Adviser with the States of NY, CT
and NJ. Advisory services are only offered to clients or prospective clients where Lane
Financial Management and its representatives are properly licensed or exempted.

No advice may be rendered by Lane Financial Management unless a client service agree-
ment is in place.

Stock investing involves risk including loss of principal. Investing in international and
Emerging Markets may entail additional risks such as currency fluctuation and political in-
stability. 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 ad-
versely affect the value of these investments.
The human race has
Investors should consider the investment objectives, risks, and charges and expenses of
one really effective
mutual funds and exchange-traded funds carefully for a full background on the possibility
weapon, and that is
that a more suitable securities transaction may exist. The prospectus contains this and
laughter.
other information. A prospectus for all funds is available from Lane Financial Management
—Mark Twain 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 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.LaneFinancialManagement.com
Edward.Lane@LaneFinancialManagement.com

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

Reprints and quotations are encouraged with attribution.

Page 11
L an e F in anc i a l M ana ge me nt
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 Fi-
nancial Management (LFM) considers to be reliable; however, LFM makes no representa-
tion 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
Wealth - any income
available data. Investment recommendations may change and readers are urged to check
that is at least one hun- with tax advisors before making any investment decisions. Opinions expressed in these
dred dollars more a
reports may change without prior notice. This memorandum is based on information avail-
year than the income of able to the public. No representation is made that it is accurate or complete. This memo-
one's wife's sister's hus- randum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securi-
band.
ties mentioned. The investments discussed or recommended in this report may be unsuit-
—H. L. Mencken able 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 indi-
rectly, 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 intended for illustrative purposes only. PAST PERFORMANCE DOES
NOT GUARANTEE FUTURE RESULTS.