February 12, 2012

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Recap On the back of predominantly good economic news, the roller coaster known as the worlds equity markets turned in a terrific month in January (and as we now know, continued the regardless of the Greek settlement. Looking forward, I believe we will continue on this slow but gradual improvement track as long as the Fed and the ECB continue to provide liquidity to their respective economic systems. That said, there remains very high unemployment and debt overhang that needs to be worked through with the open question being whether central bank liquidity injections (also known as kicking the can down the road) and acceptable corporate earnings can outlast the inevitable impact of reduced government austerity measures here and abroad. Investment Outlook Although I expect Europe to continue to

dodge bullets, I prefer to recommend playing matters safe for now by focusing on the following investments:

High quality, dividend paying common or preferred domestic stocks Broad market indexes such as the S&P 500 For sectors, regional banks, technology, energy, consumer staples and utilities Investment-grade corporate bonds For taxable accounts, municipal bond funds.

Defying gravity. In some minds, thats what equities have been doing the last 4 months with the S&P up over 16% and emerging markets up over 20% (half of which occurred in January). Europe hasnt done too badly, either, with a 10% gain in the period. Surely, investors know about unresolved developed-market debt and unemployment issues, dont they? So, whats going on? My thought is that investors have either concluded the market was oversold last Fall and this is just a correction to the level of 9 months ago or they have taken recent promising, though hardly definitive, economic news and have extrapolated it into future growth. Either way, caution is still advised. Comments welcome.

trend into February, so far). Good news during January included improving employment and manufacturing indices, the Fed signaling continuation of low interest rates, apparent economic stabilization in Europe, encouraging Q4 earnings reports, and a decent Q4 GDP increase (though with underlying questions on sustainability). The few negatives included continuing weakness in home prices and new home sales and an awareness that the European sovereign debt issues remain unresolved

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.

As you view this chart and on the following pages, note that I am 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 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
Since October 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 index except that it also incorporates reinvested dividends). More recently, the S&P has been held back around 1250 but has now reached the top of the range again (with decreasing volume, I might add). In January, the moving averages established a new upward trend owing to positive economic news in the U.S. and the appearance of Europe addressing its debt issues and SPY has now reached its upper resistance line at 135.

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From a momentum perspective, this trend looks very attractive and its tempting to believe it has more room to advance. But I have to advise caution on account of low volume and the past difficulty of breaking through the upper bound resistance at 135 (something it tried to do 3 times last year and failed). Given the strong advance since last October, a correction of up to 10% (to the blue moving average line) should not come as a surprise (Im not the only technician that sees this pattern). Before getting too euphoric over the current advance, I would remind you of the pattern that occurred October 2010 to March 2011 which looks eerily like what we have today. Bottom line: invest with caution and be patient. A correction here could be a good buying opportunity. And, if the trend continues, add slowly to your positions. Nothing moves in a straight line forever.

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. More recently, VEU appears to be more narrowly range bound between 38 and 45, almost surely as a result of the uncertainty surrounding the European debt crisis and its impact not only in Europe but in emerging markets, as well. Unlike the chart for SPY, however, the moving average trend lines are just beginning to show a positive tilt with a (now) more convincing positive outlook in the MACD analysis, as well.

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Therefore, as with SPY, while the momentum is favoring further growth in VEU, I would be cautious at this level on account of the difficulty it has had in breaking through the resistance level at 45 (it failed several times in recent months) and also because of the declining volume. As with SPY, I am willing to add exposure slowly at this point and would not be too surprised by a correction to the low 40s. While not discernible from the chart, the big issue is whether the global debt crisis has been fully discounted by the market or whether there is another major leg down. Observing the charts today, it appears the market thinks the worst is behind us, for whatever reason. It will be critical to stay tuned to market action since no one really knows the answer to that question.

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

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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 not long into the stage 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, but the pattern definitely weakened in the last couple of weeks.

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 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
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. In November 2011, AGG remained basically flat after an initial spike while LQD ex-

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perienced 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. Since November, both funds have been performing well, especially the more pure corporate bonds in LQD as Treasury rates stabilized during the period. The more interesting analysis we can make from these charts is evidence of continuing demand for investment-grade corporate bonds despite the outperformance of equities shown on page 4. That said, in the past, when LQD got far away from its 75-day moving average, a correction was in the making. For that reason, I suggest caution in adding to corporate bonds at the present time.

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.

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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 Stone Ridge, NY Reprints and quotations are encouraged with attribution.