LOWER EARNINGS VS. RATE CUTS

The S&P 500 dropped -9.5% during the 1Q with all sectors reporting declines.  Financials, down -14.7%, made the most dramatic headlines: the Bear Stearns rescue, further loan write-offs, continued illiquidity for the general economy.  Yet tech suffered even more, losing -15.4%.  The usual safe haven, consumer staples, lost -2.8% in the Q but was the best performing sector.  Energy reported its first loss in years, -7.5%, as large exploration and production companies found themselves saddled with higher costs.  The Fed began its most recent rate cuts in October of 2007, and investors naively drove the market to its highs on this hope of lower rates.  They forgot that lower rates also signal a slower economy with lower earnings.

We conclude that the stock market will remain choppy until signs of economic stability surface.  Consequently, we have not been aggressive buyers even with the market dips.  Across the portfolios, our current holdings are industry leaders, conservatively managed, with very low levels of debt.  While no one is immune in a market swoon, our companies seem to be holding up better than others.  Gold Leaf clients focused on income continue to receive their pre-determined cash flows.  In fact, some of our closed end bond funds that suffered last year have seen recovery this Q.

Gold Leaf is an independent Registered Investment Advisor that buys stocks in cash positive companies with sustainable competitive advantages.  As an independent firm, Gold Leaf provides objective investment management.  Our goal is to protect client assets on the downside while participating in most of the market's upside.  On March 31st, portfolio attributes were:

With one exception, the majority of our well performing 1Q stocks were those that had already witnessed price declines.  Watsco, the HVAC company with housing exposure, rebounded +13.8%.  Tractor Supply, a retailer, was up +10.0% from its earlier levels.  Gilead, a biotech, was the one exception.  Positive earnings have continued unabated, and the stock continued to post increases.

Given the Bear Stearns rescue, our portfolio of banks traded down in sympathy.  Clearly there are loan problems that need to be addressed.  But unlike Bear Stearns, an investment bank dependent on nightly capital inflows, our banks do not need such nightly capital infusions.  True, they do have to raise more capital to cover loan write-offs, but they need not fear a run on the bank.  Having said all this, with the stock prices as low as they are, we are holding our financial stocks as the Fed rate cuts will eventually revive the economy.