Dear client:

We finished the March 31 newsletter with the statement “now is the hardest time to invest”.  We begin the current edition with “now is the hardest time to write a newsletter”.  We will explain in a few minutes!

We all must admit that the stock market can be a confounding creature.  After looking like it was going off a cliff late last year, the S&P 500 has logged a gain of 18% year-to-date.  I can assure you no Wall Street strategist saw this coming!  We all know by now that stocks go up by around 10% per year on average going back a hundred years.  Having said that I have never seen the stock market go up by exactly 10% in any one given year.  As Warren Buffett himself once said “In the short term the market is a voting mechanism; in the long term it is a weighing mechanism”.  With today’s technology millions of investors can vote (trade) by the split second.  Our task at GSB Wealth is to sort through all the short-term noise and separate the wheat from the chaff and not be overly concerned with the day to day wiggles in the stock market.  In earlier newsletters we posited that the current economic expansion and stock bull market might carry on longer than anticipated simply because the economy was so slow to recover after the last recession.  Also be mindful that next year is an election year and the powers to be will likely do whatever is necessary to keep the economy growing and the stock market humming.  You can envision here one of the episodes of the Rocky (a squirrel) & Bullwinkle (a moose) show from the 1960’s where Bullwinkle mimics a magician and tries to pull a rabbit out of his hat, but is first greeted by a bear, followed by a lion, a tiger, then a rhino before he finally gets the rabbit to appear.  It isn’t unfathomable to liken this to our current trade and nuclear negotiations with China and North Korea where after several false starts and a lot of growling a miracle happens and agreements are signed.

We liken navigating through this environment to a pilot who is flying IFR, or instrument flight rule.  The fog is thick and visibility low, so the pilot must use all of his cockpit instruments to negotiate a safe landing.  Makes us all want to harken back to times when the pilot, or investors for that matter, could rely on VFR (visual flight rule) where the skies are fair and the runway can clearly be seen.  What is also puzzling to us is that while the stock market is hitting all- time highs, interest rates have been in a free fall since late in 2018.  Plummeting interest rates are generally incongruous with a stock market hitting all- time highs.  Stocks seem to be indicating that all is well with the economy and that corporate earnings will continue to grow well into next year.  The bond market, on the other hand, is indicating the economy will be slowing down dramatically.  We know that many of the overseas economies have indeed slowed as of late.  Here in the United States all seems solid at the moment.  Perhaps the bond market is sniffing something that is coming down the road, a precursor if you will.  Then again maybe U.S. interest rates are simply converging with the rest of the world.  German interest rates are currently negative, which has never been seen before.  Strange days indeed.

Our well researched investment process her at GSB Wealth should allow us to navigate these murky waters with a minimum of fanfare.  Our individual stock selection process weeds out the weak and shaky and concentrates on what we feel are the finest companies in their respective industries.  Our core holdings share several important characteristics.  Profitability – we like companies that exhibit high returns on invested capital.  Many medical and industrial companies exhibit this while deep cyclicals, think auto and steel companies, do not.  The deep cyclicals must pour mountains of capital into their operation just to keep their doors open.  Free cash flow generation – we are attracted to companies that are solidly free cash flow positive.  What this means is that after a company pays its employees, pays a dividend to its shareholders, and invests in research and development and factory maintenance, there is still a pile of cash leftover.  Free cash flow generation is indicative of a strong company.  That leftover cash can be utilized to further increase the dividend to shareholders, buy back stock or invest in new cutting- edge equipment.  Reasonable levels of debt- we prefer companies that don’t have to constantly tap the debt markets to fund their operations.  When the economy is strong high levels of debt can be adequately serviced.  However, when the tide turns high debt levels can be toxic, as was witnessed in the recession of 2008-2009.

We are always happy to hear from you should you have any questions or concerns.  Until then we hope 2019 continues to be a prosperous and healthy year.


Your GSB Wealth Management team

Dear Client,

Our previous quarterly newsletter written at year end was titled “Welcome to the new reality”, coming hot off the heels of a swooning stock market that cut a quick 20% off the major averages from late September through Christmas Eve.  We discussed four reasons why the environment had changed, from rising interest rates to wage inflation to a change in investor sentiment.  This newsletter could aptly be titled “Spring has sprung” as the stock market has recovered in a “V” formation and is right back up to the levels last witnessed at the high on September 20.  I am sure a lot of you are wondering “what the heck is going on here”.  In our last newsletter we explained how investor sentiment had changed, i.e. not feeling so sure and confident about the market’s future prospects.  It now seems investors are once again throwing caution to the wind.  How fickle they can be.

Our job here at GSB Wealth Management is to cut through all the noise and mis-information we hear in the press and on television every minute of every day and focus on the underlying economic fundamentals.  After cutting through the fog, things in the economics department are looking pretty good.  Let us explain.  One issue we have discussed at length in prior letters is the fact that we are now over 10 years into a stock market recovery that took hold in March 2009, logging a cumulative gain of over 400%, one of the longest and strongest recoveries on record.  The economy has been growing for 10 years straight as well, also one of the longest expansions on record.  One would naturally think we should be nearing the end, poised to fall back into economic recession and a falling stock market.  Not so fast.  The 2009 recession and stock market crash was one of the severest on record, eclipsing anything since 1929 and the few years after that.  Anybody with a house and common stock portfolio or a 401K suffered severe losses, prompting some to call their retirement plan a 201K as the account had been cut in half.  The psychological damage inflicted during that time was severe.  We still run into folks that are still scared, even after a 400% gain in the stock market, looking over their shoulder wondering if another crash is right around the corner.  Many of us remember all the iconic U.S. companies that were taken to their knees in 2009.  Many went bankrupt or had to be bailed out by the U.S. Government, including all the American automakers other than Ford and most of our largest financial institutions.   The emotional scars from that period put a long lasting, if not permanent (at least for this generation) dent in what we refer as “animal instinct”, or the inherent behavior to act aggressively and take risks.  With animal instincts pretty much quashed in the last recession, economic growth was far more subdued coming out the other side than was usual in past recessions.  It was as if folks would rather curl up and hide under a tarp than seize that next attractive business opportunity.

So here we are today, still in a growing economy with low interest rates, low inflation, growing corporate earnings, yet lacking “animal instincts” or undue risk taking that often presages the next downturn.   China’s economy shows evidence of picking up speed and oil prices are slowly creeping upward suggesting somewhat robust global growth.   The aforementioned discussion may well act to prolong The U.S. economic expansion above and beyond anything we have experienced in recent memory.  Technological innovation has acted globally to hold inflation in check.  The U.S. is now energy self-sufficient, something that was only dreamed of just a few short years ago.  The unemployment rate is at a decades low, yet labor force participation is well below prior peaks and this is pulling former retirees and those that were under employed back into the work force.  There are cross currents everywhere, which leads to the old adage “today is always the hardest time to invest”.  Our dogmatic adherence to only the highest quality investments is of great value in times like these.

And in other news:

We are very happy to welcome Will Patterson and Patrick Morris to the team.  Will brings with him many years of experience working with clients in the fields of portfolio management and planning and joins us as a Vice President.  Patrick Morris joins us from Guilford Savings Bank and will be our Office Manager and working with clients.  We also note that Connor Dolan is no longer with us and we wish him the best in his future endeavors.

We are always happy to hear from you should you have any questions or concerns.  Until then we hope 2019 continues to be a prosperous and healthy year.


Your GSB Wealth Management team



Dear client,

All of us at GSB Wealth Management hope you had a great Holiday season and a Happy New Year!  We enter 2019 on a much different stock market trajectory than we have witnessed in much of the past 10 years.  In fact, 2018 is the first year since 2008 that domestic stock markets finished the year in the red.  At first glance it didn’t seem so bad as the S&P 500 stock index and Dow Jones Industrial Average finished the year down from 6% to 8%.  However, the Russell 2000 stock index dropped over 25% from its peak in September to the trough just a couple of weeks ago.  The Russell 2000 index is a much broader representation of the stock market as it represents 2000 companies as opposed to 500 for the S&P index and 30 names for the Dow.  So exactly what is happening may you ask?  We call it “welcome to the new reality”.

Outside of the stock market, reality doesn’t seem too bad.  A good friend of mine is the CFO of a small construction company and when I ran into him last week, he asked me what the heck was going on in the stock market.  Down 500 points several days in a row then up 1000 points the next day.  He tells me his construction business hasn’t been this strong in over a decade.  “Everyone who wants a job has one, wages are going up and I hear on the news that consumer confidence is at a multi decade high”.  To which I replied, exactly!  He paused and looked at me like I was some kind of comedian or something.  He says to me BDubbs (referring to my initials of BW), you do this financial money managing thing for a living and you are telling me the market is wobbling because things are so good?  Have you lost your marbles?  I assured him that was certainly not the case as I explained to him the new reality.   I began by telling him that the stock market is driven by corporate earnings growth and that growth is now coming into question.  He says, “I just told you our business is booming”.  I get that.  Everybody knows that after last year’s corporate tax cut earnings growth was terrific.  That is now in the rear- view mirror.  The new reality is being driven by several factors, all of which are weighing on investor’s minds:  1) Unemployment is at a multi decade low and consumer confidence was recently at a multi decade high.  The stock market tends to struggle after these indicators reach such favorable levels.  2)  Wage growth is accelerating.  Many companies have raised their minimum wage to $15 an hour.  This eats into corporate profitability.  3)  Interest rates have risen at the short end.  Most companies borrow to finance and grow their business.  Paying higher interest rates eats also into profitability.  4)  Political uncertainty – are more tariffs coming?  Are we going to build that wall?  China and North Korea – are our diplomatic relations with our friends and/ or enemies getting worse?  5)  Can the stock market and economy keep growing after ten strong years?  Most of these concerns didn’t exist a few years ago.  They do now.

Getting back to my friend’s construction business.  Assume I am Mr. Market (the stock market) and I am interested in potentially buying the construction firm.  I would have been willing to pay more for it a year or two ago.  Here is why.  A couple of years ago, I estimated after reviewing the books that I could pull out $200,000 to pay myself every year.  For that I am willing to buy the business for $1 million.  Fast forward to today.  I am going to need to finance a portion of the purchase price by borrowing from the bank.  Two years prior I could borrow at 2%.  Now it is going to cost me 4%.  Because of that I am only willing to pay $950,000 for the business.  Now I have been told that all of the office help has been given a raise to $15/hour to keep the staff from defecting to Wal Mart.  That is going to increase my costs so my purchase price drops to $900,000.  I also learned that because of the recent tariffs on wood, steel and aluminum the business costs have gone up by $50,000, so I can now offer to pay only $850,000.  Finally, my confidence in the health of the future economy has cooled.  Where I before thought I could grow the sales of the business to $1.1 million in the first year, now I’m not so sure.  With a slowing economy potentially on the horizon, what if my sales instead drop to $950,000?  That makes me nervous, so I think I will only offer $800,000 for the company.  There you have it.  That is why the average stock has dropped by 20% or so.  This phenomenon is called “valuation compression”, or the willingness to pay less for businesses or for stocks because things have indeed changed.

The key going into 2019 is, has this “valuation compression” run its course or is there more coming?  To this no one knows the answer.  The market has certainly adjusted to the new reality so perhaps the sailing will be smoother as the year unfolds.  At GSB Wealth we have been monitoring the economy and markets closely and have made adjustments where necessary.  Our dogmatic adherence to only the highest quality investments is specifically designed to pull us through periods of turbulence as we are now witnessing.  Great businesses tend to withstand the test of time.

We are always happy to hear from you should you have any questions or concerns.  Until then we hope you enjoy a prosperous and healthy new year.

Your GSB Wealth Management Team





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