November 6, 2011

L a n e A s s e t M a n age m e n t
Stock Market Commentary
Market Recap No sooner did we complete the worst quarterly decline since the first quarter of 2009 last month, than the market followed up with one of its best monthly performances ever in October (sort of makes your head spin). Many reasons were given for the turnaround, including: a technical rebound from the prior two months losses, short-covering by those expecting greater deterioration and not getting it, positive corporate earnings reports (Briefing.com reports about 70% of Q3 earnings announcements exceed expectations), better-than-expected Q3 GDP, and encourag

ing reports on the European debt crisis.

Gold (GLD) wavered throughout the month, but recovered about half its decline of the prior month and turned in a respectable 6%. The aggregate bond index fund (AGG) suffered just a bit as money moved to equities, but closed the month about even (interestingly, an investment grade corporate bond index fund (not shown) turned in a whopping 2.5% gain, all achieved in the final two weeks of the month). U.S. Treasury bond rates rose slightly with 10year rates gaining about 30 b.p. as investors moved money out of Treasuries and into equities. _____________________ (cont.)

After falling on the opening day of the month, the S&P 500 (SPY) made a more-orless steady climb through most of the rest of the month to an increase of about 13% before settling back to a near 11% gain (and is now about even for the year). Emerging markets (EEM) and Europe (IEV) did even better by gaining 22% and 20%, respectively, before falling back to 16%+ and 12%+ for the month (though both are still down over 13% and 7% for the year, respectively). Oil (DBO) also recovered its prior month loss with a gain of over 14%.

With one of the historically best months for equities in October, the questions are: why did it happen and does this mark the beginning of a turnaround in the bear market that began in April. To the first question, many reasons have been given in the press (see Market Recap). I suspect all played a part. The more interesting question is the second. On purely technical grounds, I can only say that it is possible, but not definite at this point. On fundamental grounds, I need to point out that nothing has yet taken place to meaningfully address the debt and employment issues in the developed economies. But, hope springs eternal and maybe thats what we have been seeing. Comments are 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 The economic outlook remains weak. Little has changed since last month. Here are the factors that concern me the most (in no special order):

ployment derived from the credit-induced bubble preceding the current recession, what level of (un)employment is realistic going forward? European debt: The sovereign and bank debt crisis in Europe threatens the entire financial world. Throughout October, there were off again, on again reports of the Europeans reaching an agreement that would solve their debt problems. While that saga continues today, virtually everything I read indicates that the so-called solution on the table is hardly that. This crisis is far from over.

While I dont think the equity market will go gangbusters anytime soon, I do think there are some positive factors that are worth keeping in mind. Please link to this report for a good summary. Now that the equity market has recovered from most of the slump that occurred since last July and is about even for the year, in light of the saga in Europe and the lack of compromise in Washington, where we go from here is much harder to forecast. Some see a winter rally, others see more turmoil as economic and political realities just wont go away. With the relative strength of equities over bonds that emerged in October (see p. 7), a case can be made for increasing equity exposure. I would be prepared to do so, but slowly in light of the daily drama coming out of Europe and Washington. Bearing in mind that these recommendations reflect current relative performance, my suggestions as of this writing are:

Housing: The Case/Shiller index of property values is still nearly 4% below its level a year ago but continues to stabilize. This looks to be a long term problem until the overhang of housing is cleared and/or employment recovers. And among dangers is that weak and weakening housing values depress consumer spending which then becomes a feedback loop leading to further reductions and potential deflation. Employment: October job data announced at the beginning of November was 80,000 non-farm payroll jobs vs. 100,000 expected. Though not nearly enough, prior months figures were revised upwards from 103,000 to 158,000 for September and 0 to 104,000 for August. This chart tells the longer term story of a decline in the employment-to-population ration and the labor force participation rate. The question I ask myself is, in light of what I would call the unrealistic em

American debt: The U.S. also has its debt issues, both public and private. Speaking from a stock market perspective, the focus on reductions in government spending in the next several years cannot but hinder GDP growth and corporate profitability. This saga is about to play out late in November as the so-called Super Committee comes forth with its recommendations. Political gridlock: Evidence continues to be absent for a break in the political gridlock in Washington. Far from it.

High quality, dividend paying common or preferred stocks (minimizing large financials) 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 Investment grade and high yield corporate bonds For taxable accounts, municipal bond funds.

Although I have low expectations for the economic outlook over the next several years, with the Q3 GDP report of an annualized 2.5% growth, its not clear that we will actually experience a double-dip despite how it feels. Investment Outlook The investment outlook has to be seen as shaky based on the above comments and the technical analysis on the following pages. The volatility alone has to give pause to any firm short or medium term prediction of stock market performance.

Investors need to be prepared for continuing volatility.

L a n e A s s e t M a n age m e n t
S&P 500
The S&P 500 (SPY) has failed to get past the resistance level at 135 (think 1350 for the S&P 500 index) so far this year. In October, there was a sharp rebound off the support level at 112 with a current standing right in the middle of the trading range 112-135. On a technical basis, the 75 and 150-day moving averages (MA) have moved to a positive outlook, though greater momentum would be evident if the faster MA moved above the slower one. As predicted last month, the shorter term MACD indicator presaged the October bounce. While still positive, that indicator is showing a bit of weakness as of this writing. On the other hand, the longer term MACD at the bottom of the chart is showing the emergence of a positive outlook.

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While the balance of this chart points to a positive outlook, that should be tempered with an understanding of the economic and political headwinds that can cause a reversal just as sharp as the one that occurred in October. Now that relatively strong third quarter corporate results have come in (70% of those reporting beating expectations so far while revenue trends are down 10 percentage points to 62% beating expectations) and that economic signals remain sluggish at best, we have only the outcome of political events in Europe and the U.S. to look forward to for the rest of the year. Taking that all into account, I am willing to add equity exposure here, but remain cautious with a fair degree of cash or low volatility bond funds on the sidelines.

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.)
Previously, this page was devoted to emerging markets. In the future, I will be focusing on the broader international market index outside the U.S. (although there is a high correlation with emerging markets over extended periods). Similar to the S&P 500, the Vanguard all-world (ex U.S.) index fund experienced a sharp rebound off its support level in October. Interestingly, it bounced off its resistance line of 45 for the third time 4 months and appears to be back in the trading range that we observed prior to October 2010. In terms of buying

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into the October recovery, I would urge caution as the moving averages have still not begun an upward slope, much less has the faster MA crossed over the slower one (which would be a strong positive sign). On the other hand, the shorter term MACD clearly reflects the October rebound with the suggestion that the advance is not over yet. Meanwhile, the longer term (bottom) MACD is just starting to show potential. At this stage, I have to say I would limit my exposure outside the U.S. not to none but definitely limited. Besides, international exposure is implicit with the globalized nature of many U.S. companies. See page 7 for an examination of relative performance with the U.S.

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 flatness of the performance in late 2009/early 2010 that corresponds to an increase in interest rates at the time. In October, AGG basically remained flat while LQD experienced a sharp increase in total value. Since

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Treasury rates ticked up in October, I believe that LQDs performance was caused by a sharp increase in demand for corporate bonds (high yield corporate bonds had the same experience) as not everyone jumped on the equity bandwagon (and some bailed out toward the end of the month). Therefore, we might expect some volatility in corporate bonds in the coming weeks similar to what we saw in August. That said, both AGG and LQD represent reasonable safe investment categories with a little more technical support for LQD. While deterioration will occur when interest rates begin to rise, that risk seems to be off the table for now with the Feds commitment to keep rates low until 2013.

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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The divergence between the U.S. and international markets may be giving an early 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. Despite the decline in emerging markets, it is useful to note that EEM outperformed SPY over the last 3 years by over 10%. The more rapid decline of EEM in the last two years may simply reflect the convergence of the global experience of large U.S. companies and emerging market companies. Oil remains highly correlated to the equity markets for the most part and may provide little diversification. Bonds continue to turn in a respectable performance with low volatility. While gold provided a good hedge against the decline in equities that occurred July-September, it gave it back relative to equities in October.

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 aggregate bond index (AGG) on the left, and SPY to all-world (ex U.S.) (VEU) on the right. On the left, we can see that the S&P 500 began outperforming bonds in October as suggested in last months commentary. While we are still in the early stages of this relative performance, support is there to increase exposure to equities relative to bonds. On the right, we can see the S&P 500 outperforming the all-world (ex U.S.) index ETF, a pattern that began in August. Note the bottom technical indicators have turned in favor of the international index while the moving average of the relationship remained positive in favor of the S&P 500. This may be a short term phenomenon on account of the recent volatility of the markets. As said previously, I believe the safest course remains to overweight U.S. equities against international markets at the present time.

SPY, VEU, and AGG 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