lane asset management stock market commentary september 2013

7/29/2019 Lane Asset Management Stock Market Commentary September 2013

1/9

Economic and Market Recap

August got off to a good start with the lowest

reading of unemployment claims since Janu-

ary 2008 and the ISM factory index rising to

its highest level in 2 years. What followed,

however, was a steady stream of uninspired

reports for the U.S.: non-farm payrolls rising

less than expected and the weakest gain since

last March, the Philly Fed Business Conditions

Index falling below expectations, consumer

sentiment falling unexpectedly, and the Chi-

cago Fed National Activity Index remaining

negative. A flutter of positive news came in

the third week of the month with recovery in

the Euro Zone, mixed Fed speak to give hope

to those looking to postpone tapering as long

as possible and a small increase in consumer

confidence. The end of the month was all

about the growing tension with Syria

(boosting oil prices) but ended on a high note

as U.S. GDP came in unexpectedly high (2.5%

annualized vs. the previous 1.7%).

Despite emerging good news, European equi-

ties lost some of their recent luster, perhaps

to adjust for the strong showing that took

place last month.

The first week of September was a positive

Stock Market CommentarySeptember 7, 2013

Lane Asset Management

Every cloud has a silver

lining. In the case of the

clouds, we have, in no

special order: Syria, Fed

tapering, a new Fed

chairman, debt limit ne-

gotiations, Obamacare,

stretched market valua-

tions, weakening corpo-

rate profits and revenue

growth, the lowest labor-

force participation rate in

35 years, declining in-

creases in non-farm pay-

rolls and technical weak-

ness.

For the silver lining, we

have, in part: ISM Busi-

ness Activity Index and

auto sale strength,

Obamacare (!), Euro

Zone, U.K. and China re-

covery, and absence of a

major stock market bub-

ble on the horizon.

My observation: The risks

appear real and signifi-

cant but they also appear

to be rather short term.

The silver lining is a

global recovery, even if it

is slower than we would

like.

one for everything but investment grade corpo-

rate bonds as new auto sales advanced to prere-

cession levels and the ISM Non-Manufacturing

Business Activity Index (NMI), representing about

90% of the U.S. economy, came in at its highest

reading since its inception in January 2008 while

interest rates continued to rise. The Manufactur-

ing Index also had a good showing, rising to its

highest reading of the year. August non-farm pay-

rolls came in below expectations, but the market

seems to be taking that as a sign of reduced incen-

tive on the Fed to begin tapering in September, as

some thought.

Investment OutlookWhile Im concerned about the stretched valua-

tions for U.S. equities, the steady improvement in

the ISM reports and in corresponding reports in

Europe have to be taken as a positive sign for the

equity market. And, while an equity correction of

10-15% remains a possibility, maybe a certainty at

some point, the longer term horizon for equities

continues to look favorable. With that, I suggest:

Increase exposure to safer, stronger U.S. sec-

tors like consumer goods and health care

Consider adding exposure to international.

As for bonds and other income investments, I rec-

ommend keeping durations short and consider

high yield corporate bonds.

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.


2/9

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.

Page 2Lane Asset Management

August (and the first week of September) was another interesting period, technically speaking: SPY re-

versed course at the beginning of August and broke back down through support at $167 and its 50-day mov-

ing average. This is the second time the 50DMA has been pierced by the price since the beginning of the

year. Although this is generally considered to be a reversing signal, the last time (in April) turned out to be a

head fake when positive momentum quickly resumed. While the current breakdown may turn out to be an-

other head fake, until we see an increase in volume as occurred at the other reversals, Im inclined to believe the risk to the downside is some-

what greater than not.

From a fundamental perspective, we have a bit of a tug of war going with strong ISM data, auto sales and GDP growth while at the same time

market valuations seem stretched, the labor-force participation rate fell to its lowest level in 35 years and August non-farm payrolls came in be-

low expectations, including a downward revision for July. But its not those factors that seem to be having the most impact now, but rather

Syria, Fed tapering and Washington gridlock.

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. I ts prospectus can be found online. Past performance is no guarantee of future results.


Below we have two pictures of trend in SPYs price. On the left, we have a shorter term, daily view with a

spread from the top of the channel to the bottom of about 7%. In this chart, SPY has broken below the

channel in a decidedly negative move while the 50DMA has all but turned over. This is the fifth time in the

current series that price has fallen to the bottom of the channel or beyond and, while a quick recovery can-

not be ruled out, it would be only the second time this happened in the last two years (the first being this past June).

On the right, we have a longer term, weekly view with a spread from the top of the channel to the bottom of about 17%. In this view, SPY is

near the top of the channel for the 5th time in over 4 years, with 2 out of 4 of the prior times resulting in a significant correction to the bottom

of the channel. As we may be looking at a repeat of the pattern that occurred in the spring of 2011, this chart is even more worrisome when

combined with the knowledge of the stretch in the market valuation (S&P 500 PE ratios). With consideration to this chart alone, there is good

reason to keep exposure to equities below ones long term strategic allocation. Should SPY reach back to the top of the channel without an in-

tervening correction, it may be a particularly good time to take additional exposure off the table.

S&P 500 Trend


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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, are showing characteristic volatility with a rapid recov-

ery from the breakdown that occurred in June. Following a wobble in late August, VEU is now above re-

sistance at $46.35 again and this time with a barely rising 50-day moving average.

Technically, when the momentum (bottom of the chart) shifted to positive in the early part of July, that

gave a reliable indication of price recovery. Now, with the momentum turning negative, there is some

reason to be concerned about near term deterioration.

On a fundamental basis, we continue to have a very region specific outlook. We have good news from the U.K. the Euro Zone, China, South Ko-

rea and Japan while India and Latin America are struggling. On the whole, I am more prepared than I have been recently to add international

exposure, but caution is still advised.

All-world (ex U.S.)


5/9

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.

Following weakness in August, domestic equities are again outperforming investment grade corporate bonds on a relative basis. While the rela-

tionship is likely to be volatile over the coming months as the Fed works its way into its tapering mode, I expect the underlying trend to con-

tinue. On the right, the domestic equities resumed a downward slide against international equities in August and the beginning of September.

This is now the second month in a row of relative strength for international equities and could be marking the beginning of a reversal in trend

thats been going on since the beginning of the year. Once the slope of the moving average rolls over, I will be inclined to move to a more strate-

gic allocation to the international sector.

Asset Allocation and Relative Performance


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HYS is the PIMCO 0-5 Year High Yield Corporate Bond Index which seeks to correspond to The BofA Merrill Lynch 0-5 Year US High Yield Constrained Index SM*. 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.


While income investing has gotten a bad name in the last few months as the Fed contemplates

tapering its bond purchase program and interest rates have spiked, that does not mean the sector

should be abandoned altogether. In prior months, I spoke of the outperformance of preferred stocks to

investment grade corporate bonds. This month, I draw attention to short term high yield corporate

bonds represented here by PIMCOs exchange-traded fund HYS.

On the left below is a 2-year chart of total return for HYS. While the 2-year return is an impressive 10% annualized, note that for the latest 12

months the total return has declined to a still respectable 7.5%. On the right below, is a relative performance chart for HYS vs. investment

grade corporate bonds (LQD) showing the similarity of performance during a period when LQD was rising, but significant outperformance

since the first of the year as LQD faltered.

While the current yield on short term high yield bonds is less than the longer-duration Liquid High Yield Index (currently about 4.6% vs. 6.4%),

their short term nature results in the fund being less susceptible to interest rate risk while at the same time benefiting from a rising rate envi-

ronment as bond turnover is reinvested at new higher rates.

Income Investing


7/9


This chart shows the percentage increase in 1, 5, and 10-year Treasury rates since the beginning of the year. In percent-

age terms, rates skyrocketed in August and the first week in September with the 1and 5-year rates increasing over 20%

during the period while the 10-year increased nearly 10%. The 10-year rate has now increased over 80% since the begin-

ning of May, from under 1.7% to nearly 3% while the 5-year rate has increased nearly 150%. While the absolute level of

these rates isnt particularly high, the pace of change, especially for the 5-year rate, is extraordinary.

Treasury Rates


8/9


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 itself, but a

few observations may be useful:

Large cap domestic equities (SPY) lost a little ground in August, but have still maintained a very respectable 12-month return of about 17.5%. While

the gain over the last 3 months is barely over 1%, the 12-month pace is likely to pick up as year-ago negative months, particularly October, are elimi-

nated from the chart.

The Euro Zone (EZU) backed off its accelerated pace during the last two weeks of August and now matches the S&P 500 though with more volatility.

Gold (GLD) extended its recovery in August though weakness crept back in during the latter part of August.

Oil (DBO) gained a little ground in August, probably on account of the strains in the Mideast. A more spirited rise in the price of oil does not appear

on the immediate horizon.

Emerging market equities (EEM) basically drifted in August. The concern I hear is that rising U.S. interest rates are going to have a severe impact on

emerging markets. Since this view has been widely discussed yet EEM has been relatively stable, if flat, it appears that EEM may have discounted this

concern.

Investment grade corporate bonds (LQD) continue to deteriorate in the face of rising interest rates.

12-Month Performance


9/9

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 9 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

Kingston, 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.
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lane asset management stock market commentary september 2013

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