GSA Market Update April 2012

After a stellar first quarter investors were fearing and feeling no pain. The market has however recently succumbed to a wave of profit taking as we opened up the second quarter. There always is a heightened skittishness as we exit a quarter and enter into the great unknown, earnings season. For many investors this is a time for reviewing corporate fundamentals, valuations and the macro issues at large to determine comfort levels in holding onto equity and bond positions or initiate a sale. For others, emotions get the better of them and a ready, fire aim process follows. Perhaps brought on by election season, the Iranian nuclear ambitions the economic contraction in Euro group or simply KU losing in the NCAA finals. Ouch. This is what we, as disciplined investors look to avoid. Those of you GSA clients that steered through the near collapse of the financial markets with us, only to elevate back to the safety of higher ground know this is not always the easiest course to follow. But, removing emotion from the equation is the only way forward toward successful long term investing and financial security. Far too many investors sought the safety of certificates of deposit and savings accounts yielding 1/8%-1% and abandoned their strategy at or near the trough of the market rout. Now with the interest received on their new investments insufficient to meet their income needs they are eating into their principal which is irreplaceable unless of course they wish to re-enter the work force. To protect our clients GSA removes emotion from the equation to focus on long term fundamentals and opportunity even when out of vogue as the market does not move symmetrically or reward all immediately.

The economy. The economy is obviously in much better shape now then one year ago data would reflect. The non-farm payroll number was a blow to the solar plexus, but the number is volatile and uneven so taking a look at the three month average brings us to 215,000 jobs created monthly. Leading Economic Indicators. The Conference Boards Leading Economic Indicators Index flashed +.7 for February. Couple February's release with the four prior positive numbers suggests enough momentum to carry the US expansion through the summer months. Industrial Production. Industrial Production was neutral in February but add back in the January release was revised up to +.04 from 0. Manufacturing has seen a resurgence, advancing for nine of the last ten reports. A restructuring of union contracts, cheap dollar, lower gas prices and of course a highly skilled/productive workforce has prompted corporate America to begin repatriating some of those jobs they've been outsourcing for the last four decades.

Now the horsefly's in the ointment. The risks to a derailment of the global economy are no strangers to us or other market participants. Among my leading concerns, 1. China 2. Iran. 3 Europe. Let's frame them out briefly:

1. China's economy has been successfully reigned in over the last two years. Raising cash reserves for financial institutions has had the desired effect of slowing the meteoric rise in real estate prices. Whereas the Greenspan Federal Reserve held policy stable and instead countered with the now famous "irrational exuberance" phrase and nothing else, leading to a massive bubble in equities and real estate, the Chinese central bank chose to be proactive and prick the bubble before it became grotesque and unmanageable. However, monetary policy is not that precise a tool and the de-facto tightening has left some fearing China's economy will have a hard landing dragging down the global economy along with it.

2. Iran's nuclear ambitions have been brought to the fore-front along with Iran's attempt to expand its sphere of influence in the Middle East. Oil prices have been the beneficiary of the heightened tensions. A super spike in oil and gasoline at the pump would surely take the wind out of the sails of the USS Economy as consumer discretionary spending would suffer and potentially bring GDP back to stall speed.

3. Euro trash is again front and center. It appears the European Central Bank's bailout of the European banking system (3 year low interest loans offered at 1%) only prompted the brain trusts to take the $1 trillion+ or so Euros and invest it right back into the same toxic sovereign debt at the basis for what ailed them to begin with. So, now they are merely $1 trillion+ larger. BRILLIANT! Good news out recently, the ECB has issued commentary leading investors to surmise a back stop for Spain's systemically important banks, or too big to fail part deux. It's like cod liver oil, it doesn't taste good going down, but you know it will ease the discomfort.

Going Forward. The market is bracing for a weak earnings season. I don't see why. We have an expansion in the work force albeit uneven. We have growth in earnings, though somewhat tepid. We've seen a steady uptick in retail sales. Housing appears to be finally basing. We've seen consistently strong numbers on orders for durable goods and LEI. So, while the concerns stated above are very real and the jobs figures need to be watched for any new moderating trend forming as they may potentially morph into something more substantial the reality is they are for now worth monitoring only, not strategy altering issues. We view the current correction as a healthy stage in any bull market that has gone virtually straight up since October resulting in a 28% gain. We look for this shake out to be contained within a 5%-7% move, with the reversal catalyst being strong corporate earnings.

One closing note. At a time when market strategists argue non-stop whether to purchase 10 year treasuries yielding 2% or view them as the classic bear trap, we find great comfort investing in good quality, high yielding securities fetching 8%+. Sometimes it takes backing away from the forest to see the trees which is the case here also. The 8%+ yield is annualized or another way to look at it, 4% semi-annually or take a few more steps back and 2% quarterly. Just remember the remedy to the day to day volatility is those dividends constantly dripping into the portfolio. They are like Novocaine, just give it time and it always works.

Thank you again for the opportunity to work with you in these very challenging times.

Yours in pursuit of the KWAN.