lfm commentary january 2010

8/14/2019 LFM Commentary January 2010

1/13

Wow! Not many of us have witnessed a

year like 2009 beforenot so much be-

cause of market performance (see below for

the S&P 500 (black, left axis) and NASDAQ

(red, right axis) indexes in 1997, 1999, and

2003 for other examples of rapid price ap-

preciation), but for the economic conditions

and global government response to it.

Now that the year is over, I can say I learned

two important lessons: One, in the face of

impending economic disaster, do not under-

estimate the willingness of global govern-

ments to do whatever it takes to try to

lessen the pain and restore growth.

The other lesson, even more valuable from

an investors standpoint, is that the momen-

tum of a market is a more reliable predictor

of market performance than the opinions of

market strategists.

As we enter the final year of the decade

with virtually

no net growth

in either index

in over 10

years, we can

take these

lessons to inform our investment strategy

for the coming year (and beyond).

For my part, as you will see in my 2010

forecast on the following pages, I will try

not to let my current opinions about the

challenges facing the economy overly in-

fluence my thinking about investment op-

portunities, but rather give greater cre-

dence to what the market itself is telling

us through technical analysis. While fun-

damental and technical analysis both rely

on extrapolation of historical behavior,

technical analysis boils that behavior

down in a way that fundamental analysis

cannot do.

Happy New Year

Stock Market Commentary .. by Ed Lane

January 2010Lane Financia l Management

Special points of interest:

Positive market mo-

mentum continued in

December

The economy shows

signs of slow but steadyimprovement

Interest rates may be

increasing in anticipa-

tion of Fed exit strate-

gies; the market may

not be ready

2010 Fearless Forecast

starts on page 3

Inside this issue:

Happy New Year 1

At-a-Glance 2

2010 Fearless Forecast 3-5

Economic Recap 6

Market Recap 7-8

Momentum Watch 9-11

My Bottom Line 12

Disclosures 13


2/13

Page 2 Lane F inancia l Management

Here is a quick summary of this months

market commentary:

The Economy

Economic signals were generally positive for

the month:

Initial claims for unemployment insurance

continued to decline. The unemploy-

ment rate is inching downward as non-

farm payrolls declined only slightly in No-

vember

The Index of Leading indicators contin-

ued its uptrend while Consumer Senti-

ment has retraced its decline back to

year-ago levels.

Ironically, as the economy improves, recent

Fed discussions about strategies to exit

stimulus programs sent negative shocks to

the markets.

The Market

For the most part, momentum remained

positive in December:

Both the S&P 500 and Emerging Markets

performed strongly in December

Asia/Pacific (ex. Japan) gave back some

of its earlier gains but still had a strong

year

High yield bonds ended the yearstrongly as credit spreads tightened.

The chart below shows 2009 returns for

selected market sectors (detail on page 7).

The Current Opportunities

Longer term, the best opportunities are

Asia/Pacific (ex. Japan), Emerging Markets,

basic materials and technology.

2010 Forecast

The market will continue to do well, thoug

at a reduced pace, as long as government

stimulus continues to flow.

My Bottom Line

I continue to be concerned about the pros-

pects for the U.S. economy over the next

several years absent sustainable new em-

ployment opportunities. The securities

market, on the other hand, will continue to

provide opportunities for gain.

At-a-Glance

The future aint what it

used to be.

Yogi Berra


3/13


Before I offer my forecast for stock market

performance and the economy in 2010,

heres what others are saying:

In a recent Bloomberg survey of leadingstrategists from ten of the largest bro-

kerages, the S&P 500 will advance an av-

erage of 9.8% for 2010. A Barrons sur-

vey of twelve strategists predicted 12%.

Mohamed El-Erian of PIMCO has pre-

dicted a10% decline for the year (notable

since this is something few asset manager

market strategists ever do).

Economists Nouriel Roubini of NYU, Joe

Stiglitz of Columbia and Paul Krugman of

Princeton (the latter two being Nobel

laureates) have all indicated a significant

chance of economic decline in 2010,

most likely to occur in the second half of

the year, absent additional government

stimulus.

Many forecasters indicate that the S&P will

cool in the second half of the year as stimulus

funds are expended (again, absent additional

stimulus).

As an actuary, I should know not to make

predictions as the one thing we know for

sure about forecasts and assumptions of the

future is that they will be wrong. That said,

Im inclined to go along with the majority

opinion of the market strategists, namely,

that the U.S. market will be positive for the

year with the best part of the performance

occurring in the first half of the year.

My 2010 forecast reflects the ying and yang

of the U.S. market in 2010 as I see it.

On the one hand, stimulus payments and

foreign-earned profits will push the S&P

500 higher, perhaps even higher than

conventional wisdom, to a range of

1200-1300. On the other hand, the brakes will

come on when deficit reduction plans

and activities become more clear and

imminent.

The saving grace for the market in 2009

was massive global intervention. Since

over half of already approved U.S.

stimulus remains to be distributed in th

first half of 2010 and more may come,

the stimulus will have its desired effect

on consumption and will boost market

performance.

Sooner or later, as recovery appears to

be more imminent (or deficits too large

to ignore), the Fed will begin to with-

draw liquidity from the system or, at

least, signal that that moment is nigh.Ironically, when this happens, its likely

to place a strain on the market as inter

est rates increase and credit conditions

tighten. That said, I dont expect this

will occur much sooner than late 2010.

Domestically, technology, large cap,

consumer discretionary, basic materials

and medical devices are likely to be

among the best performers.

From a regional standpoint, Emerging

Markets and Asia/Pacific (excluding Ja-

pan, AxJ), though more volatile, are

likely to outperform the S&P 500 and

other developed markets for the fore-

seeable future.

2010 Fearless Forecast On the One Hand, On the Other

There's no trick to be-

ing a humorist when

you have the whole

government working

for you.

Will Rogers


4/13


Im ambivalent about the dollar. Weak-

ness is in U.S. interests in that it stimu-

lates exports and fattens foreign-earned

profits. On the other hand, as the Fed

unwinds stimulus and deficit hawks gain

the upper hand, rising interest rates will

strengthen the dollar. Bottom line, I see

the dollar strengthening by the end of

the year.

I have become less enthusiastic about

gold. With push me, pull you influ-

ences and interest rate risk to the upside,

golds expected performance is too un-predictable to continue my previous bull-

ish stance.

Quality and high yield income securities

of short and intermediate duration

(conventional and convertible bonds and

preferred stocks) will provide reasonable

returns with limited volatility. That said,

the prospect of increasing interest rates,

could put these funds (especially invest-

ment grade) under price pressure.

Despite stimulus, difficulties will remain in

the domestic economy. Ultimately, the

economy cant fully recover until final de-

mand is restored (consumer spending ac-

counts for about 65% of GDP). Stimulus

spending will support demand for a period of

time, but no one believes that can continue

indefinitely. The hope, I suspect, is that the

stimulus will provide a catalyst for a more

self-sustaining economy. Well see.

While I will lean heavily on technical momen-

tum indicators to help identify investment

opportunities, here are some of the eco-

nomic indicators affecting final demand that I

will be watching carefully:

Employment is the sine qua non to con-

sumer spending and there are several meas

ures to keep in mind, including new unem-ployment insurance claims, the unemploy-

ment rate, and hours worked. As the grap

below shows, the employment picture is

indeed improving, but still has a long way to

go. I expect new unemployment insurance

claims to continue to decrease and the num

ber of new jobs created to steadily increase

though not enough to bring the unemploy-

ment rate below 9% by year-end.

Consumer spending derives not only from

improvement in disposable income, but also

from access to, and use of, credit. There-

fore, interest rates and credit conditions w

be important factors to watch. While posi

tive in some respects, the charts on the

next page are troubling to the markets in

that interest rates are increasing and con-

sumer credit is continuing to unwind. I be-

lieve the 10-year Treasury bond rate will

continue to climb, perhaps to 4.5%, while

consumer credit continues to contract, bot

unfavorable to the economy and the marke

in the short run, at least.

Finally, I will be listening to the buzz

interviews with (admittedly selected) econo

2010 Fearless Forecast (cont.)

Any man who afflicts

the human race with

ideas must be prepared

to see them misunder-stood.

H.L. Mencken


5/13


mists and money managers who go beyond a

superficial discussion of green shoots.

Without going into detail, I would say the

economic outlook from these sources today

is cautious if not decidedly negative.

I close out 2009 and ring in 2010 with a little

investment wisdom (edited for space), cour-

tesy http://www.investmentpostcards.com/:

The Reformed Broker:If its true that we

learn new things with every passing year then the

year 2009 was like a crash course in fringe eco-

nomics, lunatic civics and paranormal market ac-

tivity all rolled up in one.

TPC (The Pragmatic Capitalist): Wall Street-

ers are like gold fish - they have very short

memories, are practically useless and require a

great deal of help from outside resources to sur-

vive.

Lawrence McDonald (Author,A Colossal

Failure of Common Sense): $10 trillion will al-

ways buy you 4000 DOW points.

Noah Rosenblatt (UrbanDigs): the fed can

really buy their way out of a depression.

Eric Jackson (Ironfire Capital):its always

darkest before the Fed jumps in with backstops

for any large institution that moves.

Francine McKenna (Re: The Auditors):

there is no need for me to be afraid but every

reason to be wary.

Trader Mark (Fund My Mutual Fund): Ben

Bernanke can remain irrational far longer than I

can remain solvent.

Karen Glassman (Tirschwell & Loewy):

Gordon Gekko has the same initials as Greed is

Good, Government and Goldman how ironi

Stuart Varney (Fox Business Network): it

is possible to borrow a trillion dollars, print a

trillion dollars and nationalize a big chunk of theAmerican economy, and still see the biggest nin

month stock market rally in three generations!

OneTwo (1-2 Knockout): no one ever went

broke underestimating the stupidity of govern-

ment.

Patty Edwards (CNBC Fast Money): mone

covers a multitude of sins, usually those of polit

cians and bureaucrats.

Tadas Viskanta (Abnormal Returns): Too

big to fail = Too big to existalso, its Gold-

mans world, we are just living in it.

Michael Panzner (Financial Armageddon)

only three words matter when it comes to in-

vesting in todays markets: ignorance is bliss.

The Analyst (The Atlantic): despite 10% (or

18%) unemployment, it totally makes sense that

retail and consumer discretionary stocks are

back up to 2007 levels.

Wade Slome (Sidoxia Capital): $14 trillion

in debt, 10% unemployment, and approval of

socialized healthcare can lead to an +80% move

in the NASDAQ Composite over a 10 month

period.

2010 Fearless Forecast (cont.)

When the facts change,

I change my mind.

What do you do, sir?

John MaynardKeynes


6/13


We ended November with the shock of Du-

bai requesting extension on their massive

debt repayment. The result was a one day

loss of nearly 2% in the S&P 500 and a nearly4% drop in the Morgan Stanley Emerging

Market index. In both cases, the indexes

bounced back the very next day suggesting,

perhaps, an over-reaction to the news of po-

tential default. Since then, weve learned that

Abu Dhabi seems to have come to Dubais

rescue with a $10 billion debt guarantee.

Other developments during the month, as

reported by Haver Analytics and Bloombergwere:

The pace of the economic recovery

lagged as the strength of inventory re-

building disappointed in November. The

degree of inventory liquidation and re-

build has a significant influence on GDP.

The labor market improved during No-

vember with the Bureau of Labor Statis-tics reporting that nonfarm payrolls fell

by only 11,000. (Payrolls need to grow

by around 200,000 jobs just to stay even

with population growth.) The payroll em-

ployment decline was the shallowest

since the recession began. Initial jobless

claims fell by 22,000 in the week ended

Dec. 26, the lowest level since July 2008.

Consumer sentiment began December

by retracing the declines of October and

November. The rise in sentiment was

near the highest since January of last

year. According to Haver Analytics, dur-

ing the last ten years there has been a

two-thirds correlation between the level

of sentiment and the three-month change

real consumer spending.

The Conference Board's Index of Lead-

ing Economic Indicators continued its

uptrend in November giving a strongsignal that the recent recession has

ended. The 0.9% rise was the eighth

consecutive monthly increase. More-

over, the 10.2% (centered) rate of in-

crease during the last six months was

nearly the strongest since early-1983.

The Institute for Supply Management

reported at the end of December that

its barometer rose to 60, exceeding the

most optimistic estimate of economists

surveyed by Bloomberg News and the

highest level since January 2006.

Then, there was this opening line to close

out the month and the year...

Dec. 30 (Bloomberg) -- Most U.S. stocks re-

treated as investors speculated the Federal Re-

serve will withdraw stimulus measures amid

growing evidence the economy is improving.

...suggesting the irony that an improving

economy will not be good for the stock

market, at least in the short run.

As indicated in my 2010 forecast, a

strengthening economy expected to lead to

a deleveraging of government debt and in-

creasing interest rates might be good newsfor deficit hawks and long term economic

health, but will put a damper on the stock

market and threaten the pace of recovery.

It seems investors are just not comfortable

yet that the market is ready to fly on its

own.

Economic Recap

An economist is an ex-

pert who will know to-

morrow why things he

predicted yesterday did-

nt happen today.

Laurence J. Peter
http://www.bloomberg.com/apps/quote?ticker=CHPMINDX%3AINDhttp://www.bloomberg.com/apps/quote?ticker=CHPMINDX%3AIND


7/13

In the chart below, we see the twelve-

month performance of several exchange-

traded and closed-end funds representing

selected investment sectors.

As I have reported in the past, in June, Au-

gust and again in October, there were rela-

tively short-lived corrections on the contin-

ued advance upward. Since I admit to my

reservations about the substance and poten-

tial extent of the economic recovery in the

U.S., I see these minor corrections as warn-

ing signals of a fragile market.

In November, upward momentum contin-

ued until the Dubai announcement the day

after Thanksgiving. Following an immediate

correction to the shock of the announce-

ment, the equity markets basically drifted in

the first half of December, improving since

then but trailing off considerably on Decem-

ber 31st. Results for December were

strongest for the S&P 500 and Emerging Mar-

kets, subpar for Europe and Asia/Pacific (ex.

Japan). Meanwhile, investment grade bonds

lost value while high yield bonds were very

strong, reflecting rising investment grade

yields and a tightening of the credit spread.

Market Recap


In spite of the cost of

living, its still popular.

Laurence J. Peter

A prospectus for the above funds can be obtained through this website:

http://moneycentral.msn.com/investor/research/etfs.aspx


8/13

Looking at selected bellwethers represented

by ETFs in the annual chart below, basic ma-

terials, technology and consumer discretion-

ary substantially outperformed the S&P 500

for the year while financials lagged.

In this monthly chart, we see real estate

(largely commercial), technology and basic

materials all have the strongest month.

Gold, on the other hand, reversed some 7%

for the month. This was attributable, in my

view, to the increase in the 10-year Treas-

ury bond rates brought about by the Feds

discussion of stimulus exit strategies which,

in turn, signaled dollar strengthening. The

graph below shows a highly (though hardly

perfect) negative correlation between

movements in the 10-year Treasury bond

rate and the gold ETF over the last three

years (past relationships cannot be de-

pended upon to continue).

Market Recap (cont.)


Get your facts first, and

then you can distort

them as much as you

please.

Mark Twain

A prospectus for the above funds can be obtained through this website:

http://moneycentral.msn.com/investor/research/etfs.aspx


9/13

This section highlights various technical

measures of momentum. These measures

are not unique and vary depending on the

subject and time period. Caution on reli-

ance is advised in the same way that caution

would be advised for fundamental analysis.

That said, I use momentum indicators to

inform trading decisions and fundamental

economic analysis to inform longer term or

secular views.

On the chart of the S&P 500 index on the

top of the next page:

Momentum, as measured by 75- and

150-day exponential moving averages

(EMA), remains positive. The weaken-

ing momentum that appeared in No-

vember gave way to continued improve-

ment in the second half of December on

a spike in volume.

The spread between the daily price and

the 75-day EMA widened in a bullish

move.

The MACD (another indicator used to

measure direction and strength of mo-

mentum) began to change course at the

beginning of October and appears to be

weakening once again.

The resistance line at 1000 has beenhandily exceeded and now forms a sup-

port to a potential correction. Ive

placed my next resistance line at 1200,

near the bottom end of the range of my

year-end prediction of 1200-1300.

The second chart shows comparable infor-

mation for the MSCI Emerging Markets in-

dex.

The 75and 150-day EMAs remain posi-

tive, though not as aggressively so as the

S&P 500.

The MACD turned bearish around the

beginning of November and continues

to have that tilt, though not excessively

so.

On the top of page 11, another chart shows

a nearly 30-year weekly value of the S&P500 index along with a 50- and 75-week

EMA and the MACD (with different parame-

ters than on the previous page). Notice

how well future price direction is

predicted by crossovers of the price and

the EMA line once the slope of the EMA

changes.

While its true that a substantial portion of

the advance since last March would have

been missed had one followed this 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.

At the bottom of page 11 we see a compa-

rable chart with a faster moving average to

indicate momentum over a shorter period.

Here we also see positive momentum, but

perhaps with less conviction as the slope of

the EMA, though still positive, is not as

strong as on the longer timeframe chart.

Momentum Watch


Fundamental analysis

explains currency move-

ment in terms of macro-

economic variables suchas growth, inflation,

monetary policy, etc.

One of the weaknesses

of fundamental analysis is

that it says very little

about the timing of

moves and risk manage-

ment.

Timing is an important

part of risk management.

Even rudimentary techni-

cal analysis can help in-

vestors fine-tune their

entrance into an invest-

ment and help quantify

the risk. Monitoring the

price action itself will

likely reveal a higher

probability of successful

opportunities.

Journal of Indexes


10/13

Technical Analysis (cont.)

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.


I have left orders to

be awakened at any

time in case of na-

tional emergency,even if Im in a cabi-

net meeting.

Ronald Reagan


11/13

Technical Analysis (cont.)

The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of

future results.


The secret to creativ-

ity is knowing how to

hide your sources.

Albert Einstein


12/13

2009 was a teachable moment, and I expect

2010 will be, as well. In 2009, we learned

that governments around the world will in-

tervene aggressively to stave off, or repair

from, a deep recession. And we learned

that it worked (so far).

In 2010 (or 2011), we will learn whether the

global stimulus was enough to rekindle

economies (some will surely benefit more

than others) for sustainable growth. And,

we will learn how governments will deal

with the humongous deficits created to pro-

vide the stimulus and the impact of theseactions on securities markets.

Ill continue my 2010 forecast with these

thoughts. With regard to the U.S. economy

and stock market, my suspicion is that the

following will occur:

The impact of already committed stimu-

lus payments will keep the green

shoots coming through the first half of

the year and maybe through the third

quarter, as well

Congress will pass a jobs bill in early

2010 that will add more fuel to the

economy

Remaining and new stimulus programs

will put more money in the hands of

consumers than did earlier stimulus

(that largely went to large financial insti-

tutions only to stay there), boosting

consumer spending

The S&P 500 as well as small and mid-

cap stocks will do reasonably well

through the first 3 quarters of the year,

especially technology and basic materials

By the fourth quarter of 2010, there will

be enough green shoots and/or the

pressure from deficit hawks will be so

strong that the Fed will begin gradual

tightening, hoping to avoid a shock to

the system as a result of tighter credit

But a shock will occur since the false

nature of the economic and market

gains in the years leading up to October

2007 (based as they were on extremely

lax credit standards and profits in the

financial sector derived from discredited

products) cannot be papered over; newindustries will need to be created and

nurtured

The U.S. stock markets will seek a new,

lower trend line as the new normal

predicted by Mohamed El-Erian of

PIMCO comes into focus.

Meanwhile, while I suspect a comparable

result will occur in other developed econo-

mies (especially in Western Europe), emerg-

ing and developed economies in Asia/Pacific

(excluding Japan) and Latin America will gen-

erate the greatest share of global growth

because:

A global economic rebalancing will be

driven by greater self-reliance and trad-

ing within their own sphere and

Their political systems are less ham-

strung than those of the West and,

therefore, can address local problems

more quickly.

** *** **

Best wishes for a healthy, happy and pros-

perous New Year.

My Bottom Line


Frankly, I am suspicious

of anyone who has a

strong opinion on a com-

plicated issue.

Scott Adams (Dilbert

cartoonist)


13/13

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.

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 Financial 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 risktaken in a portfolio should be commensurate with ones overall risk tolerance and financial

objectives.

Page 13Lane F inancia l Management

In the eyes of public

opinion, the contrarian

investor faces a lose-

lose proposition. When

contrarian approaches

fail to keep pace with

the current market

darling, more-

fashionable players

mock the out-of-step

thinker. When con-

trarian approaches sur-pass the alternatives,

consensus-oriented

players decry the irre-

sponsibility of the un-

conventional inves-

tor.

David Swenson,

Yale University Endow-

ment Fund Portfolio

Manager

Disclosures

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

[email protected]

Edward Lane

Lane Financial Management

P.O. Box 666

Stone Ridge, NY 12484

917-575-0299

Reprints and quotations are encouraged with attribution.
http://www.lanefinancialmanagement.com/http://www.lanefinancialmanagement.com/mailto:[email protected]:[email protected]:[email protected]://www.lanefinancialmanagement.com/

lfm commentary january 2010

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