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

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