Lane Asset Management 2012 Stock Market Commentary and 2013 Fearless Forecast

7/30/2019 Lane Asset Management 2012 Stock Market Commentary and 2013 Fearless Forecast

1/18

Happy New Year

Market Recap for December 2012

As shown in the top chart on page 3, this was a strong month

for international equities while it appears that performance for

U.S. equities was constrained by the ebb and flow of the fiscal

cliff discussions. Note how investment grade corporate bonds

acted as a counterweight to the S&P 500 (SPY) during the

month.

Its interesting that gold lost over 3% during December despite

concerns about the fiscal cliff and weakness in the dollar. Ill

speak more about gold in the 2013 forecast but this illustrates

the unpredictability of gold in my book.Recap for All of 2012

We live in interesting times and 2012 proved to be another in-

teresting year. Despite concerns about the fiscal crisis in the

U.S. and Europe and despite extraordinary public debt and un-

employment in the U.S. and Europe (and Japans high debt),

both the domestic and international equity markets had double

digit gains as shown in the chart at the bottom of page 3 and

so did investment grade bonds. How did this happen?

I think the U.S. equity gains over the year can be traced to sev-

eral key factors:

1. Corporate profitsEarnings growth for the S&P 500 in 2011

was up about 15%, yet the S&P 500 index was essentially flat

for that year. In 2012, reflecting a modest but steadily im-

proving recovery, from Q3/2011 to Q3/2012 (the latest data

available), U.S. corporate profits increased about 7.5% (closer

to 9% for the S&P 500 according to Goldman Sachs). There-

fore, the S&Ps near 14% advance in 2012 could be seen as a

normal catch-up for the underperformance of the prior year.

Below is a 65-year exponential chart of adjusted after-tax

U.S. corporate profits. This is the long term driver of equity

returns, so keep this in mind when we talk about the 2013

forecast.

2. Central bank support Since the financial crisis began in

2008, central banks in the U.S., the U.K., Europe, Japan and

China have tripled or quadrupled their balance sheets to an

approximate total of $15 trillion. Following a 16% drop in in-

2013 Forecast and Stock Market CommentaryJanuary 1, 2013

Lane Asset Management

Happy New Year and wel-

come to my annual year-end

summary and fearless fore-

cast for the coming year.

The number 13 is normally

associated with being

unlucky. Since the recession

began in 2008, investors have

been reluctant to make a ma-

jor commitment to equities,

present company included.

Meanwhile, the S&P 500

(with reinvested dividends)

has advanced over 100%

since that time, reaching an

all-time high last Fall. So, the

unlucky thing was that some

of us missed that ride.

But is the ride over? Not if

you listen to the majority of

market strategists today.

And not if you agree with my

forecast in this Commentary.

That said, we continue to live

under the dual cloud of high

debt and high unemploy-

ment. How those issues are

handled by politicians here

and in Europe will define our

long term performance.

Best wishes for a healthy,

happy and prosperous New

Year. Ed Lane


2/18

ternational equities in the second quarter of 2012, the ECBs presi-

dents comment to do what it takes to protect the Euro drove prices

of international equities up over 25% from that point and over 16% for

the year.

3. Interest ratesAlong with monetary expansion, low interest rates in

the U.S. fueled the demand for higher risk assets despite concerns

about the economys overall health. After rising to about 2.4% last

March, the 10-year Treasury bond rate dropped about 25% from that

point to about 1.75% by year-end.

It seems a bit incongruous that investment grade corporate bonds would

have had a double digit year in the same year as equities, but there you

have it. Here I see the causes as:

1. Interest ratesWhile Treasury rates declined in significant fashion, in-

vestment grade corporate bond rates came down only slightly. This in-

creased the spread between the Treasury and the corporate bond rate,

pulling investors into corporate bonds as they sought to maximize re-

turn with no significant increase in risk.

2. Investor demandStill shell-shocked investors poured $250 billion

into bond funds in 2012 while equity funds lost $130 billion (a process

that now seems to be reversing).

Beyond the U.S., international equities did much better than expected, at

least by me. Across the board, international stocks lagged the U.S. for

most of the year (this is as I did expect) but then finished higher primar-

ily, I think, on account of the fiscal cliff uncertainties in December that

held beck U.S. equities. Among the countries that outperformed the U.S.

were:

Germany, Belgium and France in Europe

South Korea, China, India, and Singapore in Asia, and

Mexico in Latin America (I wonder if Brazils significant underperfor-

mance will reverse in 2013)

Interestingly, emerging market bonds not only outperformed investment

grade and high yield U.S. bonds, but they outperformed the S&P 500, as

well. There was little discernible difference between U.S. investment grade

and high yield bonds based on respective index-related funds.

Against this performance for equities and bonds, gold wavered throughout

the year, finishing up about 5% (less than half its high for the year but well

above gold miners which finished the year down about 11% according toone related ETF index).

Based on the index-related ETF, oil actually fell about 10%. My suspicion is

that this was due to the global slowdown and recessionary concerns since

the dollar was basically flat against developed economy currencies while

falling against Asian currenciesone would expect that a decline in the

value of the dollar would result in an increase in the price of oil.

(Please note that performance results for exchange-traded funds (ETFs)

2013 Forecast and Stock Market Commentary

Lane Asset Management Page 2


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As you view this chart and on the following pages, note that exchange-traded funds (ETFs) are used as proxies for the indicated market indexes since indexes cannot be invested in

directly. 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.

Page 3Lane Asset Management

December and All of 2012


4/18

I begin with a brief forecast of economic conditions followed

by a forecast of stock market performance.

The Economic Forecast for 2013

The principal economies driving performance of investment

markets are: Europe, the U.S., China, Japan, and Emerging

Markets (especially Latin America and Asia/Pacific).

The first thing to keep in mind is that the performance of the

local economies, as measured by their GDP, has less to do

with the performance of the domestic markets than meets

the eye. The reasons for that are two-fold:

First, GDP is a measure of national expenditures which is

essentially a proxy for business revenues. While changing

revenue does have an impact on profits, the main driver of

stock prices over the long term is earnings per share which is

driven by many factors, including expense reduction and

share buybacks.

Second, companies operate in a global economy. What

happens in one major economy can affect the performance

of companies around the world.

The second thing to keep in mind is that stock price per-

formance is determined by many factors other than corpo-

rate performance, including the current P/E ratio relative to

historical norms, investor sentiment and M&A activity.

Therefore, we will spend only a little time on economic fore-

casts. In terms of the global outlook, the typical forecast is

for real (inflation-adjusted) GDP growth of about 3% with

steady improvement throughout the year. Here are com-

ments on the larger economies:

Europe:

The 27 countries of the European Union represent the largest

economic block in the world. Within the EU is the Euro Zone, a

group of 17 countries that make up the monetary union with acommon currency, the Euro. It is primarily within the EZ that the

impact of the sovereign and bank debt crisis on the worlds econo-

mies is being played out.

The Euro Zone is in a tough spot. Unemployment across the

Zone tops 11%, 25% in Spain. Total public and private debt ap-

proaches 450% of GDP (the U.K., though not in the EZ, has debt

of over 500% of GDP) most of which is held by banks and nonfi-

nancial companies.

Like the U.S., the EZ is torn between increasing austerity to re-

duce debt and stimulus to grow the economy and reduce unem-

ployment. Given the political complexities of the EZ, it appears

that the region will struggle to achieve any growth at all in 2013.

The United States:

The worlds second largest economy is the United States. As hap-

pened in 2012, in fundamental ways, the financial problems in the

U.S. are very much the same as in Europe: high national debt, high

unemployment, and political impediments to taking decisive ac-tion. In addition, the inevitable slow down/recession in Europe will

take a toll on American businesses on account of the impact on

exports as well as profits generated from overseas operations.

On the other hand, the U.S. has advantages that Europe does not

have: a single national government that, at least theoretically, can

make sweeping fiscal and regulatory changes when the pressure

gets high enough and a central bank that has the proven ability to



To quote from

Bob McTeer, for-

mer head of the

Dallas Fed, The

first rule of fore-casting should be

dont do it. Noth-

ing good comes

from it. The second

rule, is, if you give

a number, dont

give a date; or, if

you give a date,

dont give a num-ber. My rule, the

third rule, is, if you

have to do it, do it

often.

Ill keep that in

mind.


5/18

take decisive and effective action to prevent, or at least mitigate, a reces-

sion or deflation. American businesses have the further advantage of hav-

ing the strongest balance sheets theyve had in years.

Against that backdrop, here are my economic forecasts for 2013 (plus a few

from the Street):

Unemployment ended the year a bit below my 2012 forecast and is now

around 7.7%. I expect that to fall further by the end of 2013 to about

7.2% (this modest reduction reflecting my concern about drag from the

eventual fiscal cliff agreement)

Monthly non-farm payroll increases are hovering around my last years

estimate of 150,000 and I dont expect a significant change in 2013, cer-

tainly not above 175,000 by the end of the year.

My CPI estimate for 2012 was high at 2.5% as it is settling in closer to 2%

and thats going to be my estimate for 2013.

My estimate of U.S. real GDP growth (above inflation) of 1.5%, for 2012

was a little light with the real rate topping 2%. On account of the fiscal

cliff negotiations, Im anticipating lower real growth in 2013, say, back to

my 1.5%.

My estimate of corporate profits falling below 8% for 2012 was in the

ballpark in that the Bureau of Economic Analysis showed the most re-

cent annual increase at about 7.5%. For 2013, I think corporate profits

may slightly improve to, lets say, 7.8% overall and 9% for the S&P 500.

The Case-Shiller home price index did stabilize in 2012, as expected, and

may show the first annual gain since 2006. My expectation for 2013 is an-

other small improvement in the neighborhood of, say, 5%.

My estimate of the 10-year Treasury bond rate remaining below 2.25%

was achieved in March, but subsequently dropped back to about 1.75% at

year-end. For 2013, with the Feds promise to keep short term rates

low until unemployment substantially improves, I expect the 10-year

rate to be in close proximity to 2% by the end of the year.

I was right that there would be no tax reform in 2012 and that there

would be promise of reform in 2013. The key word is promise, in

that I believe political interests will prevent major reform from hap-

pening any time soon. For comprehensive reform to occur, it will have

to be phased in over a long period of time. Well see what emerges.

My expectation of dollar strengthening turned out to be wrong as the

Fed managed to keep the dollar about even with developed economies

in Europe while fal ling against Asian currencies.

The preceding forecast assumes no major disruption due to war or fiscalcalamity.

China:

Chinas growth rate will fall just below 8% in 2012 according to Morgan

Stanley who also predict a slight improvement above 8% in 2013. Gold-

man Sachs estimates an 8% growth rate. Who am I to argue when these

two agree?

Japan:

Japan has the highest gross debt (public and private) as a percent of GDP.Both Goldman Sachs and Morgan Stanley are predicting sub 0.5% growth

for Japan. Again, no argument from me.

Emerging Markets:

By their nature, emerging markets (speaking principally of Asia and Latin

America) lead global growth. In 2012, EM will have real GDP growth of

about 5% according to Morgan Stanley and somewhat higher growth in

2013. I concur with that estimate.




6/18

The Investment Forecast for 2012

The Equity Markets

Before making predictions, lets start with a few observations:

Page 11 shows the total return of the S&P 500 index over the last 30+ years

and the last 10.

The longer term chart shows that over extended periods of time, if you

ignore the disruptions caused by the tech bubble and the current reces-

sion, the index growth from peak-to-peak and trough-to-trough averages

roughly 9.5%. This chart also shows that the index generally stays within

a range of +/- 12% around its 50-week moving average.

The shorter term chart shows this pattern in a more magnified manner

for the last 10 years. The 9.5% pattern continues, though this trend isshorter and, therefore, less reliable.

The long term momentum indicators at the bottom of the charts

(MACD and Full STO) are in neutral territory, showing neither up-

ward nor downward momentum. However, the 50-week moving average

envelope is showing positive momentum.

Another observation has to do with corporate profits. Note the chart on

page 1 showing the steady improvement in corporate after tax profits. This

next chart shows the annual percentage change in those profits (blue) over-

laid with the annual percentage change in the S&P 500 (red). Note the

close correlation.

Looking back over the last 10 years, I calculate that corporate profits have

increased by an average of over 10% per year. Since the recession began in

2008, I calculate the average to be between 13% and 15% (depending on

my data source), though this was heavily influenced by a very strong year in

2010.

Thus, given the historical long term trend growth of the S&P 500 index

of about 9.5% (which, by the way, does not include the gains from rein-

vested dividends averaging about 2%) and the corresponding growth of

corporate earnings, I think it would be reasonable to conclude that that

pattern is likely to continue.

Now the question is what will happen in 2013. We all know about the

excessive levels of public and private debt as well as the high unemploy-

ment levels in the U.S. and, especially, Europe. The assumption on the

part of some is that that debt will need to be reduced in the coming

years through fiscal drag, that is, a combination of tax and spending

policies that reduces the annual deficits to a more sustainable level. This

drag, along with the prospect for increasing interest rates in the future

lead some of my favorite sources of investment analysis to conclude that




7/18

corporate profits will be inevitably impacted and that equity returns, there-

fore, will be curtailed from historical levels. In prior years, I have fully

bought into this argument leading to my more subdued expectation of eq-

uity returns (also known to some as the new normal).Now, Im not so sure. Heres why:

For the last 30+ years, equity performance has had three major resets

in 1987, triggered by program trading, in 2001 for the tech bubble

and in 2009 for the housing/credit bubble. After each of those interrup-

tions, the market got back onto its historical growth trend, albeit from a

reset starting point. Unless we believe that another reset is imminent

and I dont the long term trend should remain more or less on track.

The second reason Im somewhat sanguine about equity growth continu-

ity is that the major central banks and the national governments have

demonstrated a commitment to implement policies to mitigate a finan-

cial crisis. Yes, printing money has been a big part of the solution, but if

everyone does it, the main harm that is done (at least, so far) has been to

debt holders who are repaid with deflated currencyand this is

stretched out over a long period of time rather than occurring suddenly.

Similarly, I believe the drag resulting from fiscal or monetary restraint

will also be stretched out over many years.

Its just possible that global growth is about to benefit from a set of fac-tors that have been brewing over the last couple of years. In the U.S., we

have the real possibility of an energy boom and energy independence;

the growth of China, India and other emerging nations will bring enor-

mous numbers of people into the worlds economy, creating both de-

mand as well as productive resources.

The U.S. output gap will constrain inflationary pressures. Here, from

Wells Capital Management, is a chart of the U.S. gap.

According to Wells, since WWII, only once did a recovery end be-

fore the gap was closed. My research suggests that the gap wont be

closed for at least the next three years

Considering that a large source of the gap comes from the unem-

ployment level, and considering that the Euro Zone's unemploy-

ment is even larger than that in the U.S., I think it is reasonable to

assume that a global gap will stand in the way of inflationary pres-

sures.




8/18

Corporate earnings have recovered and PE ratios are reasonable.

That said, the less commonly referred to Shiller PE ratio, which normal-

izes the PE ratio by using an inflation-adjusted 10-year average, is on the

high sidea negative omen.

So, my bottom line is this (drum roll, please): Absent a war or similar

shock, I expect the S&P 500 (adjusted to include reinvested dividends) to

increase by 9% in 2012.

But heres a wrinkle. The market never goes up (or down) in a straightline. For the past 20 years, and probably longer, the market has almost al-

ways had a correction during the year, often exceeding 8%, following a pe-

riod of growth. Whether this is psychological, profit-taking or due to eco-

nomic news, who knows? But, if history is any guide, we can expect such a

correction again in 2013.

Since...

the S&P 500 (SPY) had such a strong year in 2012 (up about 16%),

forward looking revenue and earnings reports are weakening, much uncertainty remains on account of the continuing Washington ne-

gotiations for spending reductions, and

the technical chart for SPY is signaling caution,

...my expectation is that the correction (or, at least, weakness) in 2013 will

come in the first half of the year with recovery and strength in the second

half.

So, having made my prediction for the S&P 500 (SPY), what about interna-

tional equities? The chart on page 12 shows the relative total return per-formance of the S&P 500 (SPY) compared to Europe and Asia. While the

pattern in 2011 showing relative strength for the U.S. led me to conclude

that the S&P was in the driver seat for 2012 (as it was for 6-9 months), the

current outlook clearly favors the international sector over the U.S. Given

the length of the cycle that favored the U.S. and the protracted dysfunc-

tion in Washington, Im inclined to think that the relative strength of inter-

national markets, especially in Asia will persist throughout 2013.




9/18

Income-based Markets

There is near consensus that bonds are in a bubble. Have a look at the

chart on the top of page 13. It shows the Dow Jones Corporate Bond index

over the last 15 years had a compound annual growth rate of about 7.3%

per year. During that same period of time, the 10-year Treasury bond rate

fell 70% and the S&P 500 (SPY) advanced only 4.7% per year.

Among almost all the analysts I read, the feeling is that interest rates cant

go much lower and, indeed, that we are drawing close to the time of even-

tual rate increases. While the Federal Reserve has now tied short term in-

terest rates to the unemployment rate with anticipated rate increases not

coming for another 3 years or so, that doesnt keep the markets from driv-

ing up interest rates if it is felt that inflation may be entering the market,

risk premiums need to be widened, or that bonds are just due for a correc-

tion as may occur in any bubble. And, as you know, rising interest rates

drive down the value of bonds.

While I cant say Im not also concerned given the consensus of market

analysts, I am not yet ready to give up on bonds and other interest-oriented

securities. Heres why, along with my 2013 expected return scenarios:

For the U.S. investment grade corporate bond market, which might be

seen as the most vulnerable after Treasury bonds, the diversification ofbonds in the index fund that I follow (LQD) results in maturing bonds

being reinvested in the more current rates. Therefore, as/when interest

rates rise and the bonds roll over, it is not clear to me exactly what will

happen to the overall index and Im willing to wait and see how the index

actually changes. In 2012, LQD rose over 10% of which about 4% was

from interest and the rest from factors that drove up the value of the

bonds (e.g., investor demand and declining interest rates). My total re-

turn estimate for 2013 for LQD is 7% but I admit this will take careful

watching.

Emerging market bonds represent another source of fixed income

but carry some additional risk related to geography and currency.That said, while emerging market bonds (using the iShares JPMorgan

US Dollar Denominated Emerging Market Bond Fund EMB) carry

about the same yield today as investment grade corporate bonds

(LQD), they outperformed LQD by almost 6.5% in 2012 for a total re-

turn of about 18%! With the trend relatively steady throughout 2012,

from a technical standpoint, there is fair support for continuation into

2013. Given my lowered expectation for LQD, I will also introduce

some conservatism for EMB, forecasting 2013 total return of 12%.

Preferred stocks were a favorite of mine for 2012 and they begin 2013

as a favorite again. Using the iShares S&P Preferred Stock Index

(PFF) as the benchmark, the yield at year-end 2012 was about 6%

and the total return for 2012 was over 16% (who said you cant make

money in preferred stocks?). Since a little over half of the 2012 gain

came from demand factors in the first two months of 2012 and that

the annualized trend in the last half of the year is more like 10%, my

expectation for preferred stocks in 2013 is lowered to 8%.

Municipal bonds is the last category for the income-based securities I

will review in this forecast. In 2012, the Nuveen Closed-end Municipal

Bond Fund Index gained 16%. (See the chart at the bottom of page

13.) Note that this is a leveraged fund index in which the fund manag-

ers borrow at low interest rates and use the proceeds to purchase ad-

ditional bonds. Like other leveraged closed-end funds, this strategy

has been very successful in recent years for obvious reasons. The ques-

tion is whether market sentiment and prevailing borrowing rates will




10/18

support similar returns in the future. It should also be noted that, while

not as prevalent in the index, many of the leveraged and unleveraged

municipal bond funds from various fund managers experienced a sharp

selloff in the last quarter of the year on account of profit-taking (many ofthe leveraged funds were up more than 20% at that point) and concern

about diminishment of the tax advantaged interest coming from fiscal

cliff negotiations and tax reform (p.s. the tax agreement on January 1st

did not alter municipal bond interest deductions and the funds are show-

ing a sharp improvement on January 2nd). Even after the selloff, how-

ever, many of the leveraged funds ended the year with a total return in

the neighborhood of 15% including roughly 6% of federally tax free in-

come. In contrast, the unleveraged fund represented by the iShares S&P

National Municipal Bond Fund (MUB) finished the year with a total re-turn of about 5%, about 2.9% coming from federally tax free interest. My

sense for next year is that the leveraged muni bond funds will stabilize in

the absence of interest rate movements and significant tax law changes,

and will have a total return of 15% while the unleveraged funds, subject

to less interest rate risk, will provide 6% total return in 2013still very

acceptable compared to taxable bonds, not to mention, Treasury bonds.

Putting it al l together, even if the equity markets perform as advertised, it

appears at this stage that a balanced portfolio with an income-oriented

component can add value along with reduced volatility.

Real Estate, Oil and Gold

The Dow Jones Real Estate Investment Trust Index rose almost 13% in

2012, most of which occurred in the first four months of the year. As home

prices stabilize and improve in value, this index is likely to share in the

benefits. My forecast for real estate is for a 10% gain in 2013 .

Oil had a difficult year in 2012, losing over 12%. The factors that influence

the commodity are quite varied and include geopolitical risks, currency

valuations, sentiment toward economic growth, and supply dynamics. I

think the message for 2012 was one of overriding concern about a global

slowdown. Believing these concerns have about run their course, I ex-pect a modest increase in the price of oil for 2013, say, under 5%.

As I said last year, while Im aware of studies that indicate gold can en-

hance returns without added portfolio risk, I see investments in the shiny

metal more of a trading play than a long term investment and would

limit exposure to a small portion of a portfolio, if that much. I place no

estimate on the price improvement for gold in 2013.

** *** **

As the developed economies of the world address the difficult issues of

debt deleveraging and unemployment, as well as political dysfunction, in-

vestors need to keep a watchful eye on the performance of market seg-

ments both absolutely and relatively, in order to avoid unwelcome sur-

prises. Keep in mind my previous comment about the S&P 500 experi-

encing adjustments of 8% or so in almost every year over the last 30+

and use that information as an incentive to remain balanced in the asset

allocation. If volatility would be hard to live with, there appear to be vi-

able income-oriented investments with reasonable expected returns to

balance the portfolio though, of course, nothing can be guaranteed.




11/18


Lane Asset ManagementPage 11


12/18




13/18




14/18

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.


The S&P 500 (SPY) remained essentially flat in December as the fiscal cliff negotiations went through its

motions. Now that the immediate crisis has been averted, we can look forward to the next round of talks

in a couple of months when the debt ceiling is confronted and spending cuts become front and center.

Technically speaking, its hard to tell whether the current slowdown in momentum is due entirely to the

just-ended negotiations or whether a longer view was in mind that sees the potential for continuing dys-

function in Washington. My suspicion is the latter, but well have to see what January brings. Accordingly, I

advise caution in terms of any substantial new commitment to owning U.S. equities. Its not that Im not optimistic about

the prospect for favorable returns in 2013 as discussed in my forecast, its that I would like to see some positive momentum in addition to

some escape velocity from the current support/resistance level at $142 before increasing my commitment to the S&P at this time.

S&P 500


15/18

VEU is an exchange-traded fund designed to match the performance of the FTSE All-world (ex. U.S.) Index. Its prospectus can be found online. Past performance is no guarantee of future

results.


In contrast with domestic equities, I have become much more bullish for international equities. As shown

below, the broad all-world index has clearly broken free of its resistance line at $42 while the spread on the

moving averages is increasingly positive. If there is a cautionary note in the chart, it can be found in the

emerging weakness in the bottom two momentum indicators. For now, however, I am going to read that as

the potential for letting off a little steam given the strength of the index over the last 5 or 6 weeks. It may

be worth holding some cash aside to take advantage of a correction if it comes.

For investment purposes, theres nothing wrong with the broad index. However, if you drill down to individ-

ual regions you will find some real disparity with Asia (excluding Japan) showing the most strength and Latin America the least. Europe as a

whole is matching Asia at the moment, but I dont see a compelling reason to go there in light the economic headwinds.

All-world (ex. U.S.)


16/18

LQD is an ETF designed to match the experience of the iBoxx Investment Grade Corporate Bond

Index. EMB is an ETF designed to match the iShares JPMorgan USD Emerging Market Bond Fund. Prospectuses can be found online. Past performance is no guarantee of future results.


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

bonds. EMB represents the JPMorgan US Dollar Emerging Market Bond Fund, about 85% of which is gov-

ernment bonds.

Following the massive net influx into bond funds during 2012, LQD has now stalled over the last two

months reflecting a rotation back into equities, possibly on concerns of rising interest rates. As I dis-

cussed in my forecast, Im not yet convinced its time to move out of U.S.-based investment grade corporate bonds as these concerns have sur-

faced in the past. That said, there are alternatives to corporate bonds that should be considered for diversification and performance. One,

shown below, is emerging market bonds represented by the exchange-traded fund EMB. The chart on the right shows the outperformance of

EMB relative to LQD. Clearly, there is risk involved as can be seen from the volatility of the relative performance chart, but the trend is positive

and the momentum is supportive.

U.S. And Emerging Market Bonds


17/18

SPY, LQD, and VEU are exchange-traded funds designed to match the experience of the S&P 500 total return index, the iBoxx Investment Grade Corporate Bond Index, and the FTSE All-

world (ex US) 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 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 (VEU) on the right.

On the left, we can see a pattern for the last 6 months of reversing momentum between SPY and LQD with modest current support for equi-

ties over U.S. corporate bonds. On the right, we see a 5-month pattern of international equities outperforming those of the U.S. , reversing the

pattern of the prior 12 months. This is a much stronger pattern with all momentum indicators supporting an increase in allocation to interna-

tional equities.

Asset Allocation and Relative Performance


18/18

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 18 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 quest ions 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/

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Lane Asset Management 2012 Stock Market Commentary and 2013 Fearless Forecast

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