GSB Wealth Management Newsletter, October 1, 2018

*See note at the end re: trade fees

Dear client,

With fall upon us we thought it might be educational to look at the mid term elections coming up in November as well as the gubernatorial election right here in Connecticut.  No, we are not going to talk politics as we are not interested at being the poor old mole in the game whac-a-mole.  However, here locally we will be making a decision as to who is going to run a state that is broken financially and may be headed for far tougher times if the can continues to be kicked down the road.  So far all I have heard in the press is the usual sniping about which guy is the bigger rat and which guy is going to cut taxes more.  One party wants to cut my property taxes by $700.  I think I am going to throw a party.  Last I looked I pay property taxes to my town and not the state so this one has me a bit vexed.  On the other side the guy is going to eliminate the state income tax.  I suppose we don’t need to pay the state police, teachers and firefighters anyway.   If I were running for office I would articulate why the state is in financial difficulty and what steps we need to take to set us on the right track.  Then again, I would have a less than 1% chance of winning as no one wants to hear the truth.  It is fine to cut everyone else’s programs and benefits just don’t cut mine!

On a national level things are just as contentious and divided.  The reason we bring this up is that it makes our jobs as financial advisors that much more challenging.  It is hard enough to try and decipher where the economy is going, where the stock market is heading and where interest rates may end up.  It is harder when we don’t know what rhetoric or hard line language is going to come out of Washington next.  Again, we seek to make no judgements here.  The whac-a-mole concept mentioned earlier is alive and well in the Capitol, so it seems.  There appears to be little compromise, rather an attitude that you either agree with what we are doing, or you’re fired!    We mention all of this because we have spoken to many of you and heard your concerns about these issues (and others), and many wonder why the stock market has done so well.  The reason is that because in the stock market’s eyes, much of this doesn’t matter.   The economy has a mind of its own and cycles from recession and bear market to strong growth and bull market approximately every 10 years.  We are now approaching 10 years in the current growth/ bull market phase.  President Obama was inaugurated January 20, 2009 – almost at the bottom of the worst U.S. recession since the great depression of the 1930’s.  It wasn’t his fault and he benefited from economic growth and a great stock market for the balance of his eight- year term.  President Trump was inaugurated on January 20, 2017, eight years into economic recovery and a strong stock market.  Some would argue he was set to fail coming into office so far into an economic recovery.  The recovery under Obama was relatively slow.  No fault of his own.  He inherited an economy that had been taken to its knees and like the aftermath of the great depression, growth was slow and subdued for many years after.  Trump came in and cut corporate taxes which added fuel to an economic fire that was already starting to burn more brightly.  Such tax cuts are likely to prolong economic recovery beyond the usual 10- year cycle.  At GSB Wealth Management we still feel we are in the late innings of the current cycle and bull market that began in March of 2009.  We also acknowledge that recovery may continue for some time to come.  At the same time, we are starting to see excesses that typically signal that economic contraction may be waiting in the wings.

We have been asked by several clients “how often do you look at my portfolio”?  The answer, literally, is “all of the time”.  We own a concise list of securities in our client accounts.  These securities all have “ticker” symbols that are listed on the quote machines on our desks.  If you own any given stock in your portfolio, you can be assured we know where the price of the stock is at any given minute.  We also conduct our own research so have a firm understanding of that stock’s fundamentals at any given time.  As mentioned in earlier newsletters, GSB Wealth Management invests in the highest quality securities we can find.  We firmly believe this is the best way to grow a client’s portfolio over the long run while at the same time limiting losses when the tide turns.   We are always happy to hear from you should you have any questions or concerns.  Until then we hope you enjoy the fall season.

Your GSB Wealth Management team

*Trade fees – Please note that if your total investment with us is under $1 million, and you are signed up for email delivery of Fidelity’s documents (trade confirms, statements, etc.), Fidelity’s trade fees are $4.95 per trade; otherwise they are $17.95 per trade if you are signed up for paper delivery.  Please notify us at if you would like to change your delivery option.  Total investments of $1 million or more will automatically receive the $4.95 per trade regardless of delivery option.







GSB Wealth Management Quarterly Newsletter 6/30/2018

Our last newsletter started with “Happy Spring” coming out of March after four consecutive Nor’easters and trees and limbs down everywhere.  I was debating whether to start this newsletter with “Happy Summer” but decline to do so after being caught in the May 15 tornado and now suffering 8 consecutive days of insufferable heat where I don’t even want to stick my toe outside.  I was sitting at home yesterday on July 4th and heard on the news that the President tweeted that OPEC should immediately reduce oil prices by 10%.  He must be smarter than I am because I don’t know how to tweet, nor care to look like a bird brain trying to figure it out.  I had my daughter try to explain it to me and I suddenly started to feel bold, technologically speaking.  I decided I was completely capable of posting a selfie of my Snapchat while at the same time tweeting and slinging it to Hulu via my Netflix account.  Let’s see the President do that!  Seriously speaking, I find it curious that we expect to make progress by tweeting threats, whether it be to reduce oil prices by 10% or flogging Harley Davidson because they want to move production overseas.  All due to the tariffs that were recently imposed making Harley’s cost of production prohibitive here in the states.  We spoke to this in our last quarterly letter.  Tariffs do nothing but create spats.  Tit for tat.  You tax my steel and I’ll tax your bourbon.  Manufacturing usually migrates to the lowest cost producer.  First it was Japan in the 70’s followed by Thailand, then Cambodia, then Korea, and now China.  Trying to stop such progression sounds good on paper but is difficult in reality.

Remarkably, the stock market is taking all of this in stride, essentially being about where it started the year despite all of the day to day volatility.  Last year was terrific for stocks so taking a breather for a period of time is actually quite healthy.  The Dow Jones Industrial average has almost quadrupled from its March 2009 low of 6,600, making this one of the most powerful advances in history.  From a duration standpoint this bull market is running at almost nine and a half years, making for one of the longest advances in history.  We spoke in an earlier newsletter to dichotomies in the current economy, from booming RV sales in Elkhart Indiana where assembly lines workers are make over $90,000 per year to other areas in the country where people are struggling just to pay energy and food bills.   Another potential speed bump we are watching closely is what is referred to as the “yield curve”.  We have alluded to the yield curve in past investment letters, but it is worth revisiting again.  Simply put, the yield curve is the difference between long term interest rates (defined as the 10-year US Treasury note currently yielding 2.8%) and short-term interest rates (the 2-year Treasury note yielding 2.6%).  When the economy is healthy and growing soundly the yield curve tends to be fairly steep with the 2-year Treasury note at, say 3% and the 10 year at 6%.  When recession is in the offing the yield curve tends to “invert”, where the 2-year Treasury note actually pays more interest than the 10-year note.  In the past year or so the yield curve has been flattening to where the current difference in yield between the 2-year Treasury note and the 10 year is only .20%.  What this is telling us is that the Federal Reserve feels the economy is strong and may need to be cooled with further short-term interest rate increases.  Conversely, the Fed has little control over long term interest rates.  Long term rates are set by the “market” – investors, economists and market participants.  They are telling us a different story, that the economy is likely to be weaker than people expect in the months ahead.

GSB Wealth is watching this situation carefully.  Should the yield curve “invert” then an economic slowdown, if not outright recession, is likely to follow.  Our disciplined investing and bias toward high quality bonds and stocks will carry us through any potential rocky periods as it has in the past.  The economy is currently firm and corporate earnings have been coming in strong.  We hope this continues, but if it doesn’t please be assured that your GSB Wealth Management team has a firm hand on the tiller.

As always, please contact us with any questions and/or concerns.

Your GSB Wealth Management team.

Dear client:
Recent goings on in Washington and the financial markets remind us (at least those of us who are old enough to remember) of a line in one of John Lennon’s hit songs titled “Nobody Told Me”. The line we refer to is “strange days indeed”. More on that later. The first three months of 2018 has been a wild ride, at least compared to the past few years of relative tranquility in the financial markets. The S&P 500 stock index blasted out of the gates with a 7% gain by the end of January, only to reverse course and give all of the gains up by the end of March. The economy is not to be blamed here as growth has been rather slow and consistent dating all of the way back to 2009 when the recovery first kicked in. Stocks (at least up until a couple of months ago) had been sailing along as well in a remarkably calm fashion and historically low levels of volatility. The winds of change are upon us.
There are many dichotomies happening in an economy that is said to be strong and resilient and poised for further gains. On the plus side, in a large portion of the Midwest companies are struggling to find qualified workers if they can find workers at all. Stories out of Iowa reference manufacturing companies turning away customers due to lack of man power. These companies are willing to pay and train kids right out of high school only to find no takers. Then there is the Recreational Vehicle capital of America, that being Elkhart, Indiana where the unemployment rate is essentially zero. RV sales have blown past the last peak set in 2006 and are over three times the level of sales in 2009. Wages have spiraled to $90,000 for assembly workers and over $100,000 for foreman, a lot of money by northern Indiana standards. Companies are offering signing bonuses for new employees to stay on board. For one month. $85,000 to $95,000 Ford Expeditions and Lincoln Navigators are flying off the lots. Dealers have little or no inventory. On the other hand, a recent study by a very reputable (by our standards) economics think tank paints a far grimmer picture. We all know borrowing, whether corporate, government, or personal has been strong and growing in the recent era of cheap money. Deeper analysis suggests that quite a bit of personal borrowing (think credit card debt) has not been for fancy new cars or to spruce up the house, but to finance purchase of basic essentials – food, energy, health care. This suggests a deeper structural issue where much of the middle class is being stressed just to pay their bills every week. The same study suggests that the U.S. economy cannot tolerate much of an increase in interest rates due to the level of debt already outstanding. Where an increase in rates from say 3% to 6% might not have harmed the economy much 20 years ago, today such an increase might be quite damaging.
Back to Mr. Lennon and another line from his song: “everyone’s a winner and no one seems to lose” harkens to the nice gains in the stock market in recent years and particularly those with an affliction to the largest technology or “FAANG” stocks. The market has been strong and the general economy seems to be in good shape and possibly getting stronger. Recent corporate tax cuts are allowing firms to drop more money to the bottom line without selling a dime more in product or services. But wait a minute, here comes Washington. As this letter is being written more tariffs are being threatened on China, far and above what was proposed just a week or two ago. China will not take this sitting down and will retaliate. None of this is positive. Tariffs do nothing but raise the price of goods and services that Americans use every day. Given the aforementioned stress many households are under to meet their obligations, higher prices are far from welcome. Remember wages are still growing at a fairly slow historical pace and certainly not enough to offset the higher prices that punitive tariffs might produce. Making our jobs here at GSB Wealth tougher is deciphering all of the rhetoric coming out of Washington, not to mention the almost daily barrage of tweets. If I ever get fired I hope it isn’t via a tweet. We are good at analyzing the economy, setting client objectives, valuing individual stocks, etc. What is very difficult is to know whether a misguided tweet may cause the market to gain or drop 1000 points in any given day. That is why GSB Wealth adheres to high quality investments, sets reasonable client objectives, creates a solid long- term plan and sticks to that plan. Survey after survey has shown that trying to ”time” the market i.e. jump out then jump back in, is a losing proposition. Constructing a solid long-term plan with quality investments and sticking to that plan is the best means to an end. That is what we do.
As always, please contact us with any questions and/or concerns.

Your GSB Wealth Management team

Dear client:

2017 has turned out to be quite a year in the financial markets. We can think of few individuals who thought that the stock market (S&P 500) would return close to 20% when all were prognosticating in January of last year. We have to admit that GSB Wealth management was surprised as well but we are happy to take what we can get while we can get it. We have discussed in recent newsletters that the stock market seems fully valued, if not over valued yet there is nothing in the immediate future that looks to us to knock the market off of its perch. Many clients have called us with concern about recent goings on in Washington, threats from North Korea, the new tax bill, income inequality, and a myriad of other things reported in the daily news. In reality, these issues have little effect on the long-term health of the stock market and economy. What is reality is that the U.S. economy is picking up steam from the subpar growth trajectory we have been witnessing since the recovery began in 2009. Corporate earnings growth drives stock prices and earnings growth has been gaining momentum as interest rates remain at historically low levels. Should this continue in 2018, we may expect common stocks to log returns in line with the growth in corporate earnings, which would be a welcome sight coming off the solid gains witnessed in 2017. The strengthening economy is something we will be closely watching as stronger growth has the potential to start putting upward pressure on interest rates. We have been in a “goldilocks” economy for several years now. Not too hot nor too cold. Corporations have benefited greatly from low interest rates. Favorable borrowing costs have been a boost to earnings as firms refinance older high cost debt or borrow cheaply to invest in modern technology and new equipment. Low financing costs have also allowed companies to buy back their own stock, reducing shares outstanding to goose earnings growth. Finally, higher interest rates would give investors an alternative to owning stocks. Think back to 1987 leading up to the 22% drop in one day in October. The stock market had performed in a spectacular fashion through late summer and had become highly valued, as it is today. At the same time interest rates had been increasing and peaked with the 10-year Treasury Note hitting 10% by August. This in part contributed to the crash. Stocks now had serious competition in a 10% return from a guaranteed government bond. Such does not exist today but bears watching as the economy strengthens.

Changing direction, GSB Wealth Management intends to no longer distribute quarterly performance reports in the future, preferring to review such information on an ad hoc basis at client meetings or during periodic conference calls. Reporting quarterly seems to us to go against the very philosophy of GSB Wealth Management at its core. We structure client portfolios with a long-term view, taking each client’s risk tolerance into consideration and constructing portfolios with time tested securities of high quality. Constantly comparing against a particular index (and there are hundreds to choose from) doesn’t make sense to us and threatens to have one take his/her eyes off the ball or potentially change philosophy in order to chase an index that may have little resemblance to the securities in one’s own portfolio. We saw this happen in 1999 as many investors capitulated and bought into the internet stock craze in an effort to keep up with “the market”. Shortly thereafter the train went off the tracks and crashed. We made this decision only after careful consideration and thought, backed up by the thinking of Warren Buffet, John Bogle (founder of Vanguard) and other well renowned professionals in the investment management field. We will still have performance data at our fingertips at any given moment and are happy to share that data at any time and will do so on request. As always, we of course are open to your suggestions and/or concerns and encourage you to contact us at any time for further discussion. We hope you have a great New Year.

Your GSB Wealth Management Team

Dear client:

This quarter’s newsletter will be somewhat abbreviated compared to previous newsletters as many of the trends we spoke about in June are still in place. The stock market, as defined by the S&P 500 has gained approximately 14% year-to-date. We are somewhat surprised by such a move given the ongoing political turmoil, risk of nuclear war, Federal Reserve interest rate hikes, and other concerns surrounding global markets. The stock market doesn’t seem to care and continues to plumb new highs. As a result stocks are now being valued, on a number of measures and ratios, near or above high points seen in 1987, 1999, and 2007. High valuations are a poor predictor of just when the next drop will come. However, the margin for error now looks to us to be fairly extreme so we are proceeding with caution. As we know, there is no insurance policy when investing in stocks and bonds. The closest thing to insurance is investing when stocks are depressed or trading at low valuations based on many decades, if not centuries of history. At the stock market lows in March of 2009, High quality blue chip stocks were trading at historically low valuations. If you were astute enough to put money in the market in March of 2009, you could have thrown darts at a stock board and done well. If you hit Procter & Gamble, Johnson & Johnson, Honeywell, McCormick – all have done well as stocks were cheap. Just the opposite is true today. GSB Wealth Management is being very selective in deploying new money and have been taking profits or trimming exposure to stocks where appropriate. Our bias toward quality is intact and we do not chase fads or “new eras”. We are cognizant that Amazon, Netflix and Tesla have been flying high and leaving many “blue chip” stocks in the dust. We saw this in 1999. Once the internet bubble burst, the high fliers were decimated and many of the stocks lost over 75% of their value. Some went to zero. At the same time, the stocks mentioned above held up relatively well and continued to prosper in the years to come. We have found repeatedly that sticking to our knitting makes financial sense, even if at times we look a little stodgy when the rocket stocks hit the launch pad.

Speaking of rocket stocks, we thought we would make a few comments on Amazon. Amazon is clearly a market disrupter, taking over market after market, the latest being the grocery industry. There is even a term for it called being “Amazoned”, as if Darth Vader comes in with his magic wand and suddenly an entire industry goes “poof”. Amazon’s share price is approaching $1000 and the market capitalization (the value of all Amazon stock outstanding) is approaching $500 Billion, one of the largest companies on the planet. What many folks don’t realize though is that Amazon makes very little in profit. For some reason Wall Street has given Amazon Carte Blanch to earn very little, year after year, as if one day they will flip a switch and earn billions. Doubtful this can happen. To flip the switch would mean raise their prices on goods they sell. And Wall Street continues to turn a blind eye. Imagine if Procter & Gamble were to come out and say they are lowering the price on Tide and Pampers and Gillette products until their profit nearly went to zero. The stock would likely get penalized harshly, falling from $90 to $50 overnight, if not lower. Yet Amazon continues along, earning next to nothing while its stock flies high. It almost seems unfair. While other companies must earn a healthy profit to garner a high stock price, Amazon gets away with earning little yet is able to disrupt industry after industry using its highly valued stock as currency. This same phenomenon was rampant at the top of the internet boom in 1999. Then it hit the wall. At GSB Wealth Management we prefer to stick with high quality companies selling at reasonable valuations, even it means giving up some relative performance in an aging bull market. We feel now is the time to focus more on managing risk than chasing return.

Sincerely, The GSB Wealth Management Team

Dear client:   We have made it half way through 2017 and a number of interesting scenarios are playing out as referenced further along in this letter.  Surprising to most, the domestic stock market, as evidenced by the S&P 500 index, has returned 8.24% since the first of the year.  Interest rates continue to be muted with the 10-year Treasury Note yielding 2.3%, little changed from the 2.45% level at year end 2016.  We referenced in our December 2016 letter how the presidential election results fueled the stock market with talk of tax cuts, regulatory reform, trade reform, etc.  As this letter is written there is some doubt regarding just how many of these initiatives will be enacted.  The stock market hasn’t cared so far.  Hope is eternal.  Prevailing wisdom is that if aforementioned new policies were enacted it would lead to stronger economic growth, more jobs, higher interest rates and higher inflation.  This would be true if the country were coming out of recession but today that is hardly the case.  The economy has been growing for eight years (one of the longest expansions on record) and the stock market has been following along, pretty much un-interrupted, since February 1, 2009.  The unemployment rate is plumbing new lows yet wage gains continue to be muted and inflation seems to be well contained.  Productivity growth has been anemic – i.e. how many widgets a worker can produce in a given time period compared to what he/she produced one year ago.  Corporations have been more interested in buying back their stock and increasing their common stock dividend than investing in automation and technology to produce more widgets.  An economy can only grow as fast as two main variables over time- population growth added to productivity growth.  Currently both variables are growing in the 1% range, hardly the recipe for considerably faster economic growth.   Having said all of that, a slow growing economy in tandem with low and stable interest rates are generally a good environment for common stock investors.  However, since we have been in this environment for years now, stocks have ascended to valuation levels that are quite high historically speaking.  Having said that stocks can remain at elevated valuation levels for years, so long as some type of unexpected event doesn’t occur.  What it does mean is that future returns on domestic common stocks should in theory be lower than what has been witnessed in recent history.  Common stocks are driven by two primary variables.  Earnings growth, which has averaged around 6% over many decades, and valuation (i.e. what investors are willing to pay for that stream of earnings growth).  The valuation story appears to be about tapped out so we may need to rely on earnings growth to push stocks higher from here.  GSB Wealth Management has also been watching several other recent market activities which deserve scrutiny.    As referenced in the financial press one month ago, five technology stocks (the so called FAANG stocks) have been driving the market higher in a disproportionate fashion.  Investors are piling into these high- flying stocks despite the risks.  We witnessed this in 1999, though to a much wider degree.  That being said, it sniffs of a speculative environment where buyers are more afraid of being left behind than employing prudent judgement and risk aversion.  Another cause for concern is the growth in “indexing”, where a mutual fund or ETF simply invests to track a particular slice of the market, say the S&P 500 index.  While indexing in itself is harmless and can be an effective way to get market exposure at low cost, its very proliferation has driven up the aforementioned FAANG stocks as these stocks are the largest holdings in the index.  Chasing one’s tail, so to speak.  Another quote we recently read, and makes more and more sense every day, is “The tide always turns, and while out of favor today, preserving capital and managing risk will be back in vogue once more, but only after a decline occurs”.  Finally, the Federal Reserve has been slowing pushing up short term interest rates for over a year now in an effort to bring rates up to a more “normalized Level”, whatever that is.  Somewhat surprisingly, long term interest rates have not responded in kind and have remained stable or even dropped somewhat.  This is not indicative of higher economic growth and inflation in the future.  Typically, a “flattening yield curve” where short term rates ratchet higher while long term rates don’t respond is a sign of weaker economic growth and inflation and is often a precursor of economic recession.   So, what are we at GSB Wealth Management doing in the face of all of this?  Namely sticking to our discipline, closely managing risk, and not chasing fads that often end badly.  We are slow to deploy new cash and have selectively reduced exposure to stocks we felt ran up too quickly.  We continue to search for high quality instruments that seem to us fairly valued or undervalued.  We will continue to monitor the market, economy, and new administration closely.  If we feel adjustments need to be made, we will make them.

The GSB Wealth Management team

Dear Client: The year 2016 is now in the books and what a year it was for both the U.S. bond and stock markets. The year was progressing in rather calm fashion through November 4 with the stock market (S&P 500) up just over 2% and interest rates sliding throughout the year from 2.25% (10 year US Treasury bond) to 1.35% around the start of the summer. There was more concern about the economy slipping into recession and mild deflation than anything else. Economic growth was anemic and interest rates around the world were falling, in some countries to 0% or below. Then wham! It happened. The November 4 election changed everything when every major poll had the results going the other way. We talked in our newsletter dated December 2015 about the stock market being fully valued based on earnings and fundamentals and how we expected 2016 to be a tepid year for stock market returns. We were looking fairly prescient until November 4! Since then the stock market has gained about 10% and interest rates have gone up by a full percentage point. Whether any of us liked the candidates in the race or how the results panned out a few things are abundantly clear. The upturn in interest rates that started in July was an indication the Wall Street and the markets were beginning to anticipate a strengthening in the economy above and beyond what we have been witnessing since the economy bottomed in 2009. The election results threw fuel on the fire. The incoming administration campaigned on cutting corporate and personal income taxes, easing red tape and regulations, reversing or retooling Obamacare, and investing billions in our country’s neglected and crumbling infrastructure. This is music to the market’s ears. Anything that reduces taxes and amps up the country’s growth rate will lead to increases in corporate earnings. Over longer periods of time corporate earnings growth drives stock prices. The downside of the surprising election result is that we are all flying blind to some degree until enough time passes to determine if all of these new initiatives actually get passed and if so, what the ramifications will actually look like. The stock market is acting like everything mentioned above is a done deal when the President elect hasn’t even moved into the White House yet. Certain industry groups have appreciated strongly in the past 2 months while others have been left completely behind. The banks have performed particularly well closely followed by industrial stocks, the former because of potentially reduced regulation and the latter due to potentially stronger economic growth. Utilities, health care and consumer staples stocks have largely been left behind. You go to the doctor and go grocery shopping irrespective of what the economy is doing or where interest rates are at any given minute. Actually, that is what has made these industry groups such good performers over many years. These groups don’t rely on the economy to grow their earnings. As long as the population grows and folks continue to live longer, these guys should do just fine. On the contrary, recent year’s tepid economic growth has been a good back drop for the financial markets. Corporate earnings have grown enough to keep stocks on an upward trajectory while interest rates have remained at historically low levels. Low interest rates have made houses and automobiles more affordable while providing little to no competition for stocks. Going into your bank to find you can only get a percent or so interest on a CD is not likely to make you go out and sell your stocks. Bump that CD Rate up to 5% or 6% and things start to get interesting. In conclusion, we don’t want the economy to accelerate too quickly, at the risk of pushing inflation and interest rates up faster than anticipated. That would be the recipe for the Federal Reserve to clamp down on the money flow in turn potentially causing the next economic downturn and bear market in common stocks. Given the aforementioned lack of visibility regarding government policy and the incoming administration, GSB Wealth’s affliction for high quality investments should serve us well in the months to come. We are currently looking, on the margin, to rotate out or reduce exposure to those investments that have logged strong gains since November 4 and reallocate to some of the sectors that have been left behind. The market is expecting corporate earnings growth to accelerate to 12% to 13% in 2017 and 2018. This would be a tall task and if it does pan out we might expect the stock market to do reasonably well in 2017. Should some of the policies of the new administration get watered down or strung out to future years, we may see a stock market pull back as a lot of positive expectations seem to already be built in. GSB Wealth will be closely assessing government policy as 2017 unfolds and will be making adjustments to client portfolios as necessary.

Sincerely, the GSB Wealth Management Team

Dear client: We have now closed on the third quarter of 2016 and thought it would be a good time to revisit our investment management philosophy.

GSB Wealth Management’s Investment Philosophy:
The majority of our client portfolios will contain a mix of common stocks, fixed income, and cash. The weightings within these three major assets classes are determined by seven investment objectives, ranging from conservative to aggressive. Conservative objectives will normally have relatively high weightings in fixed income while aggressive objectives will lean heavily toward common stocks. Mutual funds may be utilized for specific strategies where we see added value and cannot replicate such strategies by purchasing individual securities. However, cognizant that utilization of mutual funds adds an additional layer of fees through the mutual fund’s internal management expense; we strive to employ only those mutual funds having no front or rear loads, no 12B-1 fees, and relatively low expense ratios. We believe that the majority of our clients, many of whom have already accumulated a substantial nest egg, are most interested in growing their assets when markets are in their up cycle, but more importantly preserving principal when markets are in their down cycle. As such, our first priority is preservation of capital.

Fixed Income Philosophy: We believe that fixed income investments are the anchor in a well- diversified portfolio. As such, we invest in high quality instruments with full faith that interest and principal will be paid on schedule in any economic environment. Portfolios will typically be invested in many different issuers and maturity dates to ensure thorough diversification. In today’s economic environment, we do not believe investors are being adequately compensated to invest in longer term fixed income instruments; hence most of our portfolios are short to intermediate term in nature. This is not to say we are averse to adding lower quality bonds to a portfolio when appropriate. An example was in 2008 and 2009 when the fixed income market went through an unprecedented period of volatility, not dissimilar to equities and the general economy. Many investment grade bonds depreciated in price as the economy went through extreme distress and the level of market fear was as high as any time in recent memory. Looking to take advantage of this fear, selected purchase of some of these affected investment grade bonds potentially allowed one to garner an above average yield to maturity, while also providing equity like returns as the bonds appreciated in value when market fear subsequently subsided.

Equity Philosophy: We believe that commons stocks are the primary growth engine for a diversified portfolio and should have some representation in most, if not all portfolios. Common stocks have outperformed most other asset classes over long periods of time as common stock ownership is essentially a call on the growth of earnings and/or dividends of the U.S. economy and other developed countries. Growth of principal via common stock ownership has also provided an effective hedge against the erosion of purchasing power over time by way of inflation. We believe in thorough diversification within the equity portion of a portfolio via ownership of 35 to 40 individual companies. We do not attempt to “index” our equity portfolios by mimicking the sector weightings of well- known indices such as the S&P 500 stock index. Such a strategy, while providing good theoretical diversification, will tend to shadow the performance of the market in good times as well as bad, such as 2008-2009. Instead, we are “bottom up” stock pickers, focusing on individual companies based on the quality of their franchise and future potential for earnings and dividend growth. We are, in essence, looking for companies with an “economic moat”, or those business characteristics that lead to the sustainability of a thriving franchise over time while limiting the ability of competitors to profitably enter or sustain themselves in the business. Identifying such companies is the first part of the exercise. The second part is determining the appropriate price to pay for franchises of this caliber. Our team’s long tenure in the investment management business has allowed us to develop purchase and sale disciplines based on the current valuation of a company and how that valuation compares to competitors in the same economic sector or other companies of similar quality. It is one thing to identify quality merchandise, and another ascertaining what to pay for it. We often look to “go against the grain” by purchasing quality companies when they are out of favor on Wall Street for reasons we deem as temporary. This often allows us to invest in a good franchise when it is temporarily selling for below intrinsic value. Many successful historic equity investments have been made by identifying quality franchises, then purchasing them when they are selling for below intrinsic value. As the company continues to grow, not only do we benefit from that growth but also from the valuation expansion that can happen as the stock once again becomes favored by the investment community. Our long term approach and bias to quality will in many cases result in a relatively low level of portfolio turnover, and as a result, the minimization of realized capital gains tax exposure. We encourage you to contact us should you have any questions or comments.

Sincerely, the GSB Wealth Management Team

Dear client:
Last quarter we wrote about how stock markets were rather boring in 2015 finishing the year relatively flat from January 1 of 2015. Welcome to 2016. The stock market started descending right out of the gate, dropping 10% to 12% by mid-February, only to come charging back finishing the first quarter slightly higher than where we were on January 1. For a time there in early February many were getting that sinking feeling “here we go again”. We advised to stay the course and maintain calm as the domestic economy appeared to be on good footing and that the slowdown in China and overseas economies was likely to be contained. So here we are on April 1 with markets on solid ground and investors once again thinking “everything is going to be alright”. We have to admit it would have been nice to end the quarter up 1% to 2% without all of the drama in between. Unfortunately it doesn’t work that way. These periodic dips and shakeouts are healthy for the markets, flushing out speculation and those investors that are “faint of heart”, if you will.

Much has changed in the past few months and some of it for the better. We spoke in earlier letters about the weakening of the stock market’s internal dynamics, where a handful of stocks were going up whereas the majority of stocks were in a downtrend. The market plunge in January and early February alleviated this situation to some degree. Many stocks are still 20% or more below their respective 2015 highs, but the market as a whole has been advancing in a healthy manner. The U.S. economy continues to trudge along in modest growth mode. This isn’t an entirely bad situation, though many wish growth would notch up to a higher gear. Notching the economy up to a higher gear would likely produce some unwanted side effects. Namely the Federal Reserve pushing short term interest rates higher in an effort to control inflation. This usually is a phenomenon that precedes economic recessions, something none of us wants to see with the meltdown of 2008-2009 still fresh in mind. Inflation remains well contained and energy prices seem to have found a bottom. Many analysts feel that a barrel of oil needs to stabilize in the $50-$60 per barrel range. Below that and many energy companies will eventually face insolvency; above that and the price of a gallon of gas heads back above $3. Another positive for corporate earnings growth is that the appreciation of the U.S. dollar against the currencies of our competitors is slowing. We spoke earlier about how restrained corporate earnings have been because the U.S. dollar has been so strong. As this reverses, our domestic companies that sell products overseas will get a boost to their earnings, perhaps dramatically so as the dollar appreciated rapidly over the past few years. This in itself could be a huge swing as what was formerly a large drag on earnings now becomes a tailwind.

To summarize, GSB Wealth Management’s view is that current fundamentals are pretty solid and should this continue, we may expect the stock market to finish the year with solid gains, meaning 5% to 10% upside from present levels. Clearly there are manifold variables that could throw cold water on our thought process, the first being the upcoming presidential election. We have all been amused (should we say disappointed) with the rhetoric and conduct exhibited by our presumed November candidates. Hopefully once the primaries are over the electees will calm down and actually lay out their plans of what they hope to accomplish and how they plan to get there. Other variables include the economies and currencies of our global partners and competitors. Instability in these areas can lead to instability on our shores, even if it is more psychological than actual, as we recently witness in January and February.

Dear client:

The year 2015 is now in the books and the weather has been arguably more memorable and exciting than the stock market. While the summer was abnormally long and dry and winter so far has been anything but wintry, the domestic stock markets have been relatively uninteresting. To wit, both the Dow Jones Industrial average and the S&P 500 index finished the year within a percent or two of flat. The NASDAQ Composite index fared a little better gaining over 6%, driven mainly by the major technology companies. World economic growth has been somewhat disappointing which limits the ability of U.S. corporations to produce earnings growth as most corporations garner a good percentage of their sales from overseas. Additionally, the U.S. dollar continues to be strong relative to the Japanese Yen and the Euro which puts additional pressure on corporate earnings as discussed in the GSB Wealth Management September newsletter. These trends have been in place for some time now and show no signs of abating. As such it will be difficult for the stock market to make much headway as stocks have witnessed strong gains off of the 2009 lows and appear fully valued based on the earnings per share estimates we are looking at for 2016.

We also talked about “weakening internal dynamics” of domestic stock markets in September and how a handful of the largest tech stocks were driving the market. This trend continues as we speak. Perusing the NYSE new highs and new lows list in the newspaper shows that many more stocks have been hitting 52 week lows as opposed to stocks hitting 52 week highs, an unnerving situation given that the stock market is within a few percentage points of highs hit last summer. As of December 28, 30% of the stocks in the S&P 500 are in what is considered bear market territory, or down 20% or more from their respective highs. All of this data is useful in that in past market cycles, what has been discussed above typically precedes some sort of market setback, correction (a drop of 10% from recent highs) or worse. On the positive side of the ledger, there is not a lot of competition for stocks from other asset classes. Interest rates continue to be historically low, despite the Federal Reserve Bank’s intention to push short term rates up over the next months. World economic growth and inflation expectations do not support a scenario of significantly higher interest rates. We may well see the Federal Reserve slowly increase short term rates up to 1% in 2016, while longer term rates (10 and 30 year Treasury bond) stay in the 2% and 3% range, respectively. If such is the case, money market funds and bank CD’s will still offer paltry returns in the 1% range (albeit better than zero) and longer term debt instruments may well offer rates about where they are right now. This is hardly exciting when high quality stocks pay dividend streams of over 3% that grow year over year. Gold peaked in 2011 and has been in a down trend ever since. Commodities have generally been in a downtrend due to the weak international economy, mainly China. Real estate, like stocks, has recovered strongly in the past several years so may not perform as well going forward. So the question becomes- if you sell your stocks, where else do you go to generate attractive returns?

One trend that is very exciting for the future of the U.S. is the ability of our country to move more toward energy self-sufficiency. Technology has advanced rapidly in the drilling space allowing oil and gas producers to draw more and more energy out of the ground at ever lower prices. The impact has been a drop in the price of a barrel of crude oil from over $100 to less than $40 in one short year. The price of a gallon of gas at the pump has fallen from $4.00 to $1.95, putting more discretionary income in consumer’s pockets at a time when wage growth is barely keeping up with inflation. The ramifications of this are manifold. First, the American consumer has significant funds freed up from money saved at the pump and on gas and oil needed to heat the home. Assuming the average person drives 15,000 miles per year and their car averages 25 MPG the annual savings is around $1,200. Assume the same consumer buys 750 gallons of heating oil per year the savings amount to another $1,500. The combined savings is a good percentage of the average U.S. household income and can be used to bolster household savings and/or add to consumer spending. Furthermore, most feel that it would be comforting to know that the U.S. could supply most of its own energy needs without relying on foreign countries to bridge the gap, some friend and some foe. OPEC has made clear that they will not be cutting production to balance the market as they have in the past. Many OPEC countries have large budget deficits and have pledged to keep pumping as much oil as possible no matter the price. This is a sea change and could keep the price of energy low for quite some time.

Regarding the past few months GSB Wealth Management has raised cash in several instances and has not redeployed given the issues discussed above. Should the market continue in its volatile state and perhaps move lower over the next few months, we believe it is prudent to have some cash on hand to take advantage of opportunities as they may present themselves.