Download Q4 Carnegie Counselor - Carnegie Investment Counsel

The Carnegie Counselor
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Winkers2012:
on Wall Street
Another Typical Year
We entered the year optimistic for equities due to the strong
earnings being produced by corporations worldwide. Not
Thisofpast
a number
of difficult
headwinds
one
our year
research
sources foretold
the pending
globalcaused
waterspoutsthat
in would
the financial
markets.
distractions
unfold over
the last ninety days.
The pursuit of democracy in the
Middle
tumbling
or challenging
First
andEast
foremost
was the
self-inflicted
decades-long
dictators
in Egypt,
economic drag out of Washington
Tunisia
anduntil
Libyathe
was
notday
even
that
waited
final
to enact
suggested entering the year. Unrest
policy to avoid the ‘fiscal cliff’. While
has spread to Jordan, Lebanon and
the band-aid agreement only delayed
Sudan, and by Independence Day
some
tough be
decisions,
waiting
they might
celebrating
theiruntil
own
the
final
deadline
pushed
the
country
independence. If we had known an
through
an economic dead-zone
that
earthquake/tsunami/nuclear
threat
was
unnecessary.
most
of the
would
take placeFor
in the
third
largest
year,
we
were
subject
to
a
cavalcade
economy in the world, we would have
of
political
been
more pundits
cautious.promoting
Even this their
event
candidates.
After to
spending
record
wasn’t sufficient
distract athe
steady
progression
of
stock
prices.
Similar
amount on political ads, we ended the
to a with
racehorse
withgovernment
blinders (winkers
year
the same
leaders
in
Australia),
the
market
maintained
that brought us to the precipice.
a steely focus on earnings despite the
The
Federal
ReserveThe
spent
the was
year the
many
distractions.
result
showering
economy
second bestthe
first
quarterwith
gain money.
since
1998QE
withIIan
advance
5.9%
for
After
didn’t
work,ofwe
received
the III
S&P
500
index
for to
thespend
first three
QE
and
then
a plan
months
of 2011.
$40
billion
a month buying up
mortgages. While this did drive the
The singular
obsessionagency
with earnings
yields
for government
paper
is
nothing
new
for
the
folks
that
down to treasury yields, it did little
manage
money.
For many Corporate
a decade,
to
stimulate
the economy.
the knowledge of the direction of
earnings
beenbond
the catalyst
for stock
earnings has
slowed,
yields fell,
hiring
prices
moving
higher
or
lower.
Like
was weak and growth in consumer
most investment firms, we use outside
spending has waned. Other news events
research analysts that provide us the
included the devastation of Superstorm
earnings data for the companies we
Sandy, the tragedy at Sandy Hook
Elementary, the largest tech IPO ever
inSimilar
Facebook, the
known as the
totrader
a racehorse
‘London Whale’ who lost $3 billion for
blinders
JPwith
Morgan,
the Supreme(winkers
Court upheld
the Affordable Care Act, the Olympics
inthe
Australia),
and
possible end of the
civilization
according to the Mayan Calendar.
market maintained
Furthermore, overseas growth slowed
inaChina,
the U.S.
Ambassador
steely
focus
on was
killed in Libya, Europe remained mired
despite
the
inearnings
a recession where
Spain and
Greece
both had unemployment rates above
many distractions.
20% and the Middle East continued
to reset the bar upwards on the term
“instability”. It was a particularly tough
follow. The financial media is in a tizzy
year managing stocks and bonds.
covering the case of Raj Rajaratnam,
Or was it? manager of the Galleon
hedge-fund
Group,
whoturn
couldn’t
quite
wait for the
While each
of the
calendar
public data on earnings and paid for
has its particular quirks, every year
FOU
F IRRTSH
T Q
QU
UA
A R T E R 2 00 11 21
In the news
In the news
Carnegie Ranked By Crain’s
Carnegie Investment Counsel
was recently ranked #11 in
Carnegie
wishesBusiness’
you Happy
Crain’s Cleveland
Holidays
andList
a Happy
New
April 11, 2011
of Largest
Year.
As
we
reflect
on
2012
Money Managers.
and look into 2013, while
Carnegie
was also
fastest
the
markets
andthe
economy
growing firm
managers
continue
to among
change,
the
with$100
million
or
more
under
importance of friends and
management. Thank you for
family remains.
your referrals and confidence.
Enjoy and celebrate in your
Spring is Here
own
special way.
Now that the snowy days on
the Lakeall
Erie
gone we
–From
ofShore
us at are
Carnegie
look forward to great baseball,
great weather and hopefully
even greater financial markets—
Enjoy!
insider information (allegedly). He’ll
likely go to jail, trying to earn outsized
is
challenging
due to the
various
profits
for
his clients.
While
we He’ll
are very
insider
information
(allegedly).
economic
calamities
that
inevitably
committed
to
you,
we’ll
be
pursuing
likely go to jail, trying to earn outsized
arise.
Every
quarter
different
only
public
data
for brings
our
research
to very
profits
for his
clients.
While
we are
obstacles
that
force
Carnegie
to
weigh
avoid a similar
fate.we’ll be pursuing
committed
to you,
the
anddata
potential
on to
onlyrisks
public
for ourimpact
research
portfolios.
Macroeconomic
dynamics
When
the
stock
market
ran
to
its
avoid a similar fate.
may
change
the in
weightings
of asset
highest
ground
2007, it was
propelled
the market
record
earnings
classes
and
industry
sectors.
Weits
When
theby
stock
ran to
produced
by
publicly
traded
companies
attempt
to makeincalculated
bets
to
highest ground
2007, it was
in 2006. The
accumulated
earnings
propelled
by the
record
earnings
minimize
risk
based
upon
the
income
of the or
S&P
in
2006
were
produced
by500
publicly
traded
needs
growth
objectives
ofcompanies
a$87.72,
client.
an
all-time
record
high,
sending
the by
in 2006.
When
theThe
bestaccumulated
laid plans areearnings
altered
market
above
1,468.
This
earnings
of the S&P
500weinchallenge
2006 were
$87.72,
outside
forces,
our
current
number
dipped
to
$60.80
in
2009
an
all-time
record
high,
sending
position and, if necessary, adjust the
to
but rebounded
in 2010
to earnings
$83.66.
market
above
1,468.
This
the new environment. When a credit
This
yeardipped
the forecast
for earnings
number
to a$60.80
in earnings
2009is
rating
changes for
bond or
to top
the previous
record
exceed
but
rebounded
in 2010
to and
$83.66.
are reported for a stock, it stimulates a
$95 in
earnings
according
to research
This
year
the forecast
for earnings
is
series
of decisions
as to the
impact
on
from
Standard
&
Poor’s.
If
this
were
to top the previous record and exceedto
client
values
and for
theinquiring
future.
happen,
we’llnow
getaccording
more
calls
$95
in earnings
to research
as to why
we don’t
own more
from
Standard
& Poor’s.
If thisstocks.
were to
We
know
through
behavioral
finance
We’ll
likely
hit
the
earnings
number
happen, we’ll get more calls inquiring
that
have own
short
memories.
despite
thewe
horrible
housing
market,
as toinvestors
why
don’t
more
stocks.Itthe
is
easy
to
look
back
at
the
late
1990’s
persistently
hightheunemployment,
and
We’ll
likely hit
earnings number
and
those in
were
easy years
beingsuggest
entrenched
another
war. the
despite
the horrible
housing
market,
when
everyone
lots of money.
persistently
highmade
unemployment,
and
The Federal
Reserve
hasasnot
yet
Realistically,
they were
difficult
as
being
entrenched
in another
war.pushed
interest
rates
higher,
despite
rise
any
other
time
period.
Therethe
were
of
prices
for food
and
fuel.
The
Federal
Reserve
has
notThis
yet has
pushed
negative
quarters,
scandals,
IPO
frenzy
continued
to higher,
hinder to
the
returns
on
interest
despite
the with.
rise
and
highrates
valuations
contend
bonds
notes
for
of
prices
forinterest-bearing
food
and fuel. This
has
And
ofand
course,
performance
is always
clients
needing
income.
While
bond
continued
to hinder
onand
relative;
if the
marketthe
wasreturns
up 38%
prices
have
started to head south,
it
bonds
and
interest-bearing
notes
for
we only delivered 35%, the pressure
has created
an opportunity
for us to
clients
needing
While
to
perform
was income.
amplified.
Thesebond
short
pick uphave
some
bondstoathead
prices
not seen
prices
started
south,
it
memories can work to an investor’s
in
years.
Particularly,
municipal
bonds
has created an opportunity for us to
favor
by quickly
forgetting
pain
have up
been
dropped
hotthe
cakes
pick
some
bondslike
at prices
not from
seen
of
the 2008-2009
periods.
It iscash
always
mutual
needing
to raise
as
in
years.funds
Particularly,
municipal
bonds
important,
though,
to
remember
investors
have
started
to
bail
from
bond
have been dropped like hot cakes from
the
lessons
learned
while
navigating
funds.
Our
strategy
to to
limit
thecash
impact
mutual
funds
needing
raise
as
through
tough
economic
periods
of falling have
bondstarted
prices,to
if possible,
isbond
to
investors
bail
fromand
funds. Our strategy to limit the impact
of falling bond prices, if possible, is to
own individual bonds and hold them
to maturity. Therefore, maintaining
that
cycle iswill
eventuallyand
return.
goodthe
quality
paramount
duration
own
individual
bonds and hold
them
Considering
the
stock
market
wasThis
up
we
can
live
with,
generally
short.
to maturity. Therefore, maintaining
9-16%
(depending
upon
the
index)
successful
strategy
has
been
the
catalyst
good quality
is paramount
and
duration
and
bonds
delivered
4-6%,
in
a
few
for can
a significant
in short.
referrals
into
we
live with,increase
generally
This
years
youover
might
2012
our firm
thelook
last
year.
successful
strategy
hasback
beenatthe
catalyst
and
it an
easy year.
However,
for aconsider
significant
increase
in referrals
into
we
differently
ourknow
firm over
the lastsince
year.every year
presents
obstacles.
Just like
Whilespecific
bond
prices
waterspouts on Lake Erie, the events
have
started
to
head
of
last year
appeared prices
ominous
and
While
bond
downright scary, but they blew over
south,
it has to
created
have started
head
We
know
through
behavioral
an
opportunity
for
south,
it has
created
finance that
investors
have
short
memories.
us
to
pick up some
an
opportunity
for
bonds
at prices
not in five
with
littlepick
effect.
We
believe
us to
updosome
years when we look back at 2012, we’ll
seen
inatyears.
bonds
prices
be
amazed at
the
low ratesnot
of interest.
We are positioning bonds to maintain
seen in years.
values by keeping maturities low and
The fine balance
of owning
maintaining
quality.
The year-end deal
stocks vs. bonds is paramount to
out of Washington solidifies income,
performance.
While
the headwinds
The fine
balance
of owning
capital
gain,
dividend
and estate taxes,
for bonds
are strong,
bonds areto
stocks
vs. bonds
is paramount
which are much needed certainty for
still importantWhile
for portfolios
by
performance.
the headwinds
investors,
accountants
and attorneys.
providing
necessary
income
and
for bonds are strong, bonds are
We
can now
put cash While
to work in the
stability
of principal.
still
important
for portfoliosstocks
by
market
knowing
the
rate
of taxes
on
may appearnecessary
to be Secretariat
in the
providing
income
and
profits.
year thetoU.S.
economy
Belmont
bonds
this
stabilityThis
ofcompared
principal.
While
stocks
ismay
expected
to
continue
its
slow
year, appear
we’ll continue
to use bonds
to be Secretariat
in the
recovery,
is steady
and
housing
to protecthiring
your downside
since
Belmont
compared
to bonds
this
isunexpected
improving.
A
tremendous
amount
of
events
do
occur.
Enjoy
year, we’ll continue to use bonds
the
spring
that
has
finally
arrived;
cash
around
thedownside
world is looking
to protect
your
since for a
we’ll keep focusing
onoccur.
yourU.S.
portfolio
productive
home,
the
stock
unexpected
eventsand
do
Enjoy
without
winkers.
We
continue
to
be
the
spring
that
has
finally
arrived;
market might continue to be the safest
grateful
for
your
trust
in
our
service.
we’ll keep
on your
portfolio
haven.
We focusing
look forward
to another
without
winkers.
We
continue
to be
year helping you meet your financial
grateful
for
your
trust
in
our
service.
objectives, knowing 2013 will have its
share of challenges.
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