lane asset management market commentary february 2013

7/29/2019 Lane Asset Management Market Commentary February 2013

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Economic and Market Recap

January started off with a bang and never

looked back. As I reviewed the events of the

month, what stood out was that there was a

fair amount of good news and precious little

bad news.

On the good news side was a continuing story

of companies reporting earnings beating ex-

pectations. Nearly 70% did so in the month,

beating the statistical average by 8 percent-

age points. Economic data was also strong as

December housing starts and jobless claims

both beat expectations while China reported

a surge in exports. Also driving stock prices

was pure demand as investors poured record

amounts into equities. The second week of

January saw the largest inflow to equity funds

since 2008.

On the negative side was a lower than ex-

pected GDP report for the Q4/2012. But

even that didn’t slow the bulls for long as the

details showed that some of the decline was

due to slowed government spending following

a more robust Q3.

Investment Outlook

I believe the long term investment outlook re-

mains positive. Earnings are beating expecta-

tions, the economic recovery continues to im-

Stock Market CommentaryFebruary 9, 2013

Lane Asset Management

“The future ain’t what it

used to be,” said Yogi

Berra, and I think that

might apply to the stock

market, as well. As

summarized in my 2013

Fearless Forecast, a

number of analysts were

predicting 2013 equity

returns of 10%, more or

less. Since January

brought us nearly half

way there, I think it

would be optimistic, to

say the least, to expect

the current pace to con-

tinue. So, the question

becomes. is there going

to be a period of drift or

might we see a more

significant correction

along the way. My feel-

ing is the latter since

this has been the histori-

cal pattern going back

over many years.

Should you be con-

cerned? That depends

on your long term out-

look and your tolerance

for volatility.

prove (even if not as fast as we would like), and

government policy makers have proven that they

are not quite ready to take away the punchbowl.

We might even anticipate something good coming

out of the sequestration (spending, or lack thereof)

debate, though not without a certain degree of

drama.

The fact is, this seems to be a good market for

both equities and income-oriented investments,

though not all segments of either. The ultimate

driver of equities, corporate earnings, continues to

be positive and P/E ratios appear reasonable

(though not so much for the normalized 10-year

Shilling P/E ratio). On the income side, while gov-

ernment bonds are in bubble territory and invest-

ment grade bonds are sputtering, there are other

income “plays” that remain quite attractive.

The biggest concern facing investors today seems

to be the pace of the market over the last 2 1/2

months, where the S&P 500 has gained nearly 12%,

and the likelihood is of some steam coming out of

the market in the coming weeks or months. No, I

don’t want to forget our friends in Washington.

They are sure to trip things up along the way. But I

don’t expect those problems to be long-lived.

For now, I would stick very close to broad equity

indexes, both domestic and international. On the

income side, I would look into preferred stocks,

floating rate corporate debt and municipals.

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 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.



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.


Last month, I recommended caution with regard to domestic equities — not a lowering of exposure, but

wariness about adding exposure in light of the run-up since last June and December. In addition, I was con-

cerned about the strength in emerging corporate earnings and the dysfunction in Washington. On a techni-

cal basis, while the trend remained strong, the momentum seemed to be slowing. It turns out that, for Janu-

ary, at least, those concerns were unfounded as the market continued to plow ahead, corporate earnings ex-

ceeded expectations, and tax rates were settled in the fiscal cliff negotiations. On a technical basis, trend overwhelmed momentum.

Now, as we enter February, while trend remains strong, momentum (bottom indicators) is slowing and reaching levels consistent with a correc-

tion as was true last March and September. From a support/resistance standpoint, we are in uncharted territory as the index seeks a new line

of resistance. My sense is to continue to advise caution about adding new positions. Even though economic indicators are generally positive, we

are even more extended on the bull run and the jury is stil l out on the handling of the “sequester” in Washington. It’s not impossible that the

run continues longer, of course, but I wouldn’t rush out to buy more domestic equities at this stage.

S&P 500



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.

Lane Asset Manageme nt

In some contrast with domestic equities, I was bullish on international equities last month. Trend was

strong as was momentum, and international equities were outperforming domestic. While January was a

good month for international equities and the trend remains strong, momentum has clearly slowed as the

index approaches the next line of resistance around $49. As with SPY, the momentum indicators are at

levels consistent with a pullback in prices. Therefore, I have moved to a more cautious stance with inter-

national equities — basically a holding pattern until my expected correction occurs. As for individual re-

gions, my advice is the same since there appears to be much consistency across the globe.

All-world (ex U.S.)



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

Corporate Bond Index, respectively. Their prospectuses can be found online. Past performance is no guarantee of future results.


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 I’ve 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 are strongly outperforming investment grade corporate bonds. So strongly, in fact, that a correction of

some nature should not be a surprise as the momentum indictors are signaling an overbought situation. On the right, we see that domestic eq-

uities bounced back relative to international in January. Based on the change in direction for the momentum indicators, I expect domestic equi-

ties to extend their relative strength. This is not to say I would avoid international equities as they provide proper diversification — only that it

may be time to shift the allocation in the direction of domestic equities.

Asset Allocation and Relative Performance



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. Whatever the reasons, it’s clear from the chart on the left below that the technical direction of LQD

has turned south. And with that, I would advise caution as I believe there are better places to be in the income space.

One of those better spaces is preferred stocks. As shown in the chart on the right, following a period of about 7 months of roughly comparable

performance between LQD and PFF, the preferred stock index now seems to be taking control. But preferred stocks are not the only income-

oriented alternative to investment grade corporate bonds. 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 and are not as affected by rising U.S. inter-

est rates.

U.S. Corporate Bonds and Preferred Stocks




The chart below shows the last 12-month performance of the indicated ETFs, the same ones that are on page 1. The performance speaks for it-

self, but a few observations may be useful:

Large cap domestic equities (SPY) have had a very strong 12 months with a total return of nearly 15% only to be outdone by Europe (EZU)

with a total return for the period of nearly 17% (though with a lot more volatility). Gold (GLD) slipped in October, seemed like it might be bouncing back, but has languished for the last ten weeks. While I acknowledge ex-

perienced analysts who recommend holding some gold within the portfolio, I cannot jump on that bandwagon.

Oil (DBO) has recovered nicely over the last 2 months but not enough to give it a positive return for the last 12 months.

Emerging Markets (EEM) lagged the U.S. and Europe in the first 3 months or so and have more or less paralleled since then, less so in Janu-

ary.

Investment grade corporate bonds (LQD) have flat-lined and are actually turning negative in total return.

12-Month Performance



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 one’s overall risk tolerance and financial objectives.

The charts and comments are only the author’s view of market activity

and aren’t recommendations to buy or sell any security. Market sectors


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 quest ions you may have. You can find me at :

www.LaneAssetManagement.com

[email protected]

Edward Lane, CFP ®


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 aren’t predictive of any future

market action rather they only demonstrate the author’s 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/


mailto:[email protected]




lane asset management market commentary february 2013

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