lane asset management stock market commentary june 2013

7/28/2019 Lane Asset Management Stock Market Commentary June 2013

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Economic and Market Recap

After an initial gasp caused by the ADP em-

ployment report falling below expectations

and a drop in construction spending, May re-

covered strongly for U.S. and European equi-

ties as unemployment claims in the U.S. were

the lowest since 2008 and the ECB cut inter-

est rates as Europe remained in recession and

manufacturing languished. Following the un-

employment claims report, nonfarm payroll

growth in the U.S. exceeded expectations,

prior month job reports were upgraded and

the unemployment rate fell to its lowest level

since December 2008. While Europe stutter-

stepped through the rest of the month, U.S.

equities continued to climb on the strength of

consumer sentiment hitting a post-recession

high and expansion of the Conference Boards

index of Leading Economic Indicators.

The chart below reflects the positive May em-

ployment report.

But heres the interesting part. As the econ-

omy continues to make progress, albeit

slowly, the FOMC April meeting minutes and

subsequent speeches by some of the board

members have begun to raise the specter of

Stock Market CommentaryJune 7, 2013

Lane Asset Management

Is the bloom coming off

the rose? The talk forthe last couple of weeks

is all about tapering,

the word now being

used to describe the

Federal Reserves exit

strategy from QE Infin-

ity. When the FOMCs

April meeting minutes

were released on May

22nd suggesting that ta-pering might begin later

this year, interest rates

spiked and the S&P 500

subsequently declined

nearly 3% to-date. If

nothing else, this dem-

onstrates both the fra-

gility of the market and

concern investors have

about the loss of FederalReserve support.

My own view is that the

bloom is not yet off the

rose. That said, given

the markets perform-

ance this year, I believe

the risk remains to the

downside. Be careful

out there.

tapering or a slow down in Fed bond purchases

which led a spike in interest rates in the last week

of the month. This is interesting because earlier

in the month, improving economic conditions

drove the market higher. Now improving condi-

tions, possibly leading to the Feds easing off the

QE pedal, has led to the market weakening. In

other words, investors want to see the economy

improving, but not so much that it might lead to

less support from the Fed.

On other fronts, emerging markets took a tum-

ble, oil lost all momentum and gold collapsed

again after a brief recovery from Aprils collapse.

Investment Outlook

In no change from my outlook last month, as the

economic headwinds have not subsided, I continue

to think the prudent thing to do is keep risk expo-

sure below ones long term strategic allocation:

Lessen exposure to international sectors

Increase exposure to safer, stronger U.S. sectors

like consumer goods, utilities and health care

Increase exposure to strong dividend payers.

One change from last month is that, with the spike

in interest rates, I would hold off commitments to

the multi-sector income arena until we have a bet-

ter sense of interest rate movements and investor

expectations.

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 represent ing 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.


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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

Page 2Lane Asset Management

Over the last couple of months, Ive been observing the pattern of trend and momentum for SPY and relat-

ing that to the very similar pattern that occurred in the first quarter of last year with the thought that a cor-

rection was imminent. Now Im wondering whether the current pattern is more closely related to the Fall

of 2010 where upward trend persisted for a more comparable 6 months while momentum stagnated. Since

were a little over 6 months into the current trend, looking strictly at the technical indicators, I suspect the

current pace wont go on much longer on technical considerations alone (see the next page). If we factor in the continuing recession in Europe

and the weakening trend in corporate revenues, a correction may be only weeks or a few months away. Accordingly, rather than trying to

squeeze out the last drop of gain, I suggest taking some risk off the table and paying even closer attention to those few sectors offering high

quality and strong relative performance.

S&P 500


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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.


In a new focus for my technical analysis, the charts below show a short term (on the left) and a long term

(on the right) Raff Regression Channel. The center line is the least-squares line (LSL) of best fit for the pe-

riod covered by the channel. The outer lines are equidistant from the center line at the distance of the most

extreme move during the period. (This may be more than you want to know.)

The usefulness of this analysis, as I see it, is to have an additional mechanism to indicate the underlying pat-

tern of price movement and also a mechanism to suggest when a technical correction bringing the price back to the LSL may be due to occur

(as you can see, price does not seem to remain above or below the LSL for very long).

Observing the charts below, I see the price breaking below the LSL in the short time period and coming off a high in the long timeframe. To

me, this suggests the potential for a 6-10% correction over the next month or so. While past performance is no guarantee of the future, it will

be interesting to see if history repeats itself here.

S&P 500


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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.


International equities, represented here by VEU, broke through the line of resistance at $47 in April only

to be turned back at the next line at $48.50 in May. Sure, it was caused by the continuing recession in

Europe but, as mentioned on the first page, the ECB lowered interest rates in May. So, I looked behind

the numbers and found that the EU actually had a relatively small drop in May (see the chart on page 1)

while other major regions (Latin America, China, India, and especially Japan) had a very bad month.

Therefore, I would keep my broad international exposure low and be highly selective when investing in component parts.

All-world (ex U.S.)


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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


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

choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually, or when the actual per-

centage allocation deviates from the longer-term strategic plan. One useful tool Ive found for establishing and revising asset allo-

cation 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 All-

world (ex U.S.) index fund (VEU) on the right.

As shown on the left, domestic equities continue to outperform investment grade corporate bonds. With the strong advance in May and the po-

tential of an equity correction mentioned earlier, I expect this relationship to weaken in the coming days. On the right, we see that domestic

equities fell behind international during April but took the upper hand again in May. Given the widespread challenges in the international eq-

uity markets, my inclination is minimize direct international exposure (a fair amount comes from domestic equity exposure in any event).

Asset Allocation and Relative Performance


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PFF is an exchange-traded fund (ETF) designed to match the experience of the S&P U.S. Preferred Stock 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.


LQD represents the total return (capital gains and interest income) for investment grade corporate

bonds; PFF represents the total return of the S&P U.S. Preferred Stock index.

Regular readers know that I have been very positive for investment grade corporate bonds for a long

time as even hiccups have turned out to be brief interruptions to a continuing upward trend. In the past,I have not been concerned about the prospect of slowly increasing interest rates since I expected the

turnover of bonds to those with higher yields to offset, at least somewhat, the impact of rising rates on the portfolio. Of course, another factor

is at work, and that is investor demand. Following a period of relative weakness in LQD, both trend and momentum turned positive for invest-

ment grade corporate bonds in April only to turn south again in May. While bonds may do relatively well if equities experience a correction, I

continue to believe there are more attractive income oriented investment opportunities, one of which is preferred stocks.

While the relative performance of the preferred stock index fund PFF weakened a bit in April, strength came back to preferred stocks in May.

In addition to preferred stocks, investors should look also into emerging market bonds, multi-sector bonds, floating rate corporate loans, REITs

and other income strategies that offer a good counterweight to equities. A note of caution, however: Last month I indicated these alternatives

might not be as affected by rising interest rates as would be corporate bonds. During the last week in May when rates spiked, some of these al-

ternatives had a larger negative reaction than expected.

U.S. Corporate Bonds and Preferred Stocks


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Edward Lane is a CERTIFIED FINANCIAL PLANNER. Lane Asset Manage-

ment 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 li-

censed or exempted. No advice may be rendered by Lane Asset Man-

agement unless a client service agreement is in place.

Investing involves risk including loss of principal. Investing in interna-

tional 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 es-

tablished 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 trans-

action 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

Page 8 Lane Asset Management

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 feed-

back and look forward to addressing any questions you may have. You can find me at:www.LaneAssetManagement.com

[email protected]

Edward Lane, CFP

Lane Asset Management

Stone Ridge, NY

Reprints and quotations are encouraged with attribution.

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 pos-

sibilities 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 con-

tained herein or any decision made or action taken by you or any third party in reli-

ance 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 ex-

pressed 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 ob-

jectives and financial position. The price or value of the investments to which this re-

port relates, either directly or indirectly, may fall or rise against the interest of inves-

tors. 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.
http://www.lanefinancialmanagement.com/http://www.lanefinancialmanagement.com/mailto:[email protected]:[email protected]:[email protected]://www.lanefinancialmanagement.com/

lane asset management stock market commentary june 2013

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