The Carnegie Counselor
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Exposing
Axioms
Winkers
on Wall
Street
With a history reaching back nearly forty years, our firm has
had
the pleasure
to optimistic
labor through
many market
cycles.
Along
We entered
the year
for equities
due to the
strong
the
way, being
we have
honed by
ourcorporations
skills by learning
fromNot
mistakes
earnings
produced
worldwide.
and
avoiding
emotional
one of
our research
sourcesdecisions.
foretold the pending global
TFHI IRRSD
T Q
QU
UA
A R T E R 2 00 11 31
Carnegie Welcomes
Kyle Kopeky
distractions that would unfold over the last ninety days.
This is a humbling profession
since we are graded on a quarterly
The pursuit of democracy in the
basis
and there is almost always a
Middle East tumbling or challenging
stock
that performed
decades-long
dictators inbetter
Egypt,than
those
ourLibya
portfolios.
Tunisiainand
was notThis
even is
also
a
business
that
runs
suggested entering the year.rampant
Unrest
with
theories,
adages
and
axioms
has spread to Jordan, Lebanon
and
suggesting
a
great
investor
Sudan, and by Independence can
Day be
made
by following
a fewtheir
easyown
steps.
they might
be celebrating
wethen
had known
an
Ifindependence.
only it wereIfso,
everyone
earthquake/tsunami/nuclear
would
be wealthy. Certainthreat
theories,
would takecan
place
the third
however,
be in
taken
to thelargest
bank
economy
in
the
world,
we
would
have
while others are pure conjecture.
been more cautious. Even this event
wasn’t
sufficient
to that
distract
the the
steady
The
latest
theory
made
progression
of
stock
prices.
Similar
rounds on Wall Street this summer
to a racehorse
with blinders
(winkers
even
had an ominous
sound
to
in
Australia),
the
market
maintained
it, The Hindenburg Omen. This
a steely focusscheme
on earnings
threatening
wasdespite
so rare,the
many
distractions.
The
result
the
yet so foreboding, it nearly was
always
second best first quarter gain since
proved
accurate that a serious
1998 with an advance of 5.9% for
market crash was foreboding.
the S&P 500 index for the first three
The
details of the charade are
months of 2011.
actually boring, but if five random
numerical
occurred,
and
The singularevents
obsession
with earnings
they
did, then
within
fortythat
days
is nothing
new for
the folks
the
stock
market
always
crashedmanage money. For many a decade,
except, of course, not this time. It
is
always much more interesting to
the knowledge of the direction of
forecast
a crash
to suggest
the
earnings has
beenthan
the catalyst
for stock
market
will advance
This is
prices moving
higher orhigher.
lower. Like
the
same
rationale
the
nightly
news
most investment firms, we use outside
doesn’t
landing
of
research report
analyststhe
thatsafe
provide
us the
every
plane
at
the
airport;
however,
earnings data for the companies we
if a plane misses the runway, we
now have headline news.
Similar to a racehorse
Every year we encounter the sell
blinders
(winkers
inwith
May and
go away theory.
While
it is true the volume of stocks
in Australia),
the during
trading
hands does reduce
the
summer months,
it does not
market
maintained
always result in the performance of
stocks
going down
a steely
focuswhen
onthe days
are long. There are years the market
earnings
despite
the
slides
in the summer;
however,
over the last two years it has been a
many distractions.
good period to be an investor. We
know of no investor who has ever
actually
followed this theory, but
follow. The financial media is in a tizzy
we
expect
to continue
covering
thethis
casetheory
of Raj Rajaratnam,
to
be
popular
with
the
media.
The
hedge-fund manager of the
Galleon
volume
of transactions
actually
Group, who
couldn’t quiteare
wait
for the
nearly
a
third
lower
from
five
public data on earnings and paid years
for
In the news
Carnegie
Ranked
By Crain’s
Kyle
Kopeky
joins Carnegie
as
Carnegie
Investment
Client Service Manager. Counsel
Kyle has
was recently ranked #11 in
extensive industry experience and
Crain’s Cleveland Business’
has held positions as a Senior
April 11, 2011 List of Largest
Associate and Office Manager for
Money Managers.
two family office and advisory firms.
In
these roles
shealso
has the
handled
client
Carnegie
was
fastest
administrative
custodian
growing firmneeds,
among
managers
interfacing,
office
with$100 back
million
orsupport
more under
management.
youKyle
for
and
general officeThank
oversight.
your
referrals
and
confidence.
is a longtime Cleveland native and
resident of Chagrin Falls, Ohio. She
is Here
isSpring
active in
her community, serving as
Now that the snowy days on
past president of University School
the Lake Erie Shore are gone we
Parents Association, volunteering
look forward to great baseball,
at
the Cleveland
Botanical
Garden,
great
weather and
hopefully
and
of the
Chagrin
evena board
greatermember
financial
markets—
Valley
Little
Theatre.
Kyle
likes
to
Enjoy!
sail, ski, skeet shoot and play tennis.
insider information (allegedly). He’ll
insider
information
(allegedly).
He’ll
ago,
but
the
stock
market
has
likely go
go to
to jail,
jail, trying
trying to
to earn
earn outsized
outsized
likely
eclipsed
the 2007
market we
highs,very
profits
profits for
for his
his clients.
clients. While
While we are
are very
so
volume
and
share
prices
are not
committed
committed to
to you,
you, we’ll
we’ll be
be pursuing
pursuing
mutually
only public
publicexclusive.
data for
for our
our research
research to
to
only
data
avoid a similar fate.
avoid a similar fate.
There
are investment axioms we
consider
and support
When the
thegolden
stock market
market
ran to
to its
itsthe
When
stock
ran
disciplines
used
in
managing
client
highest
highest ground
ground in
in 2007,
2007, it
it was
was
capital.
long the
most
propelled
by
the
earnings
propelledAll
by year
the record
record
earnings
quoted
government
entity
has to
produced by
by publicly
publicly traded
traded companies
companies
produced
be
the Federal
Reserve Bank.
This
in 2006.
2006.
The accumulated
accumulated
earnings
in
The
earnings
of
the
S&P
500
in
2006
were
$87.72,
powerful
independent
entity
is
of the S&P 500 in 2006 were $87.72,
an
high,
posed
withrecord
the daunting
task the
of
an all-time
all-time
record
high, sending
sending
the
market above
abovefull
1,468.
This earnings
earnings
supporting
employment
and
market
1,468.
This
number
to
2009
limiting
inflation.
Their in
ability
number dipped
dipped
to $60.80
$60.80
in
2009
but
rebounded
in
2010
to
$83.66.
butdrive
rebounded
in 2010
$83.66.
to
interest
rates to
and
control
Thismoney
year the
thesupply
forecasthas
for produced
earnings is
is
This
year
forecast
for
earnings
the
to
top
the
previous
record
and
exceed
to top
the previous
record
the
adage,
don’t fight
the and
Fed.exceed
This
$95
in
earnings
according
to
research
$95
in
earnings
according
to
research
assumes that if the Federal Reserve
from Standard
Standard &
& Poor’s.
Poor’s. If
If this
this were
were to
to
from
wants
to push interest
rates up
happen, we’ll
we’ll get
get more
more calls
calls inquiring
inquiring
happen,
or
down, we
they
will.
Many
astocks.
bond
as
don’t
own
more
as to
to why
why we
don’t
own
more
stocks.
manager
has
lost
this
battle
and we
We’ll
We’ll likely
likely hit
hit the
the earnings
earnings number
number
certainly
puthousing
client assets
despite the
thewon’t
horrible
market,inthe
the
despite
horrible
housing market,
the
path
against
Federal
Reserve
persistently
high
unemployment,
and
persistently high unemployment, and
policy.
After signaling
since
May
being
in
war.
being entrenched
entrenched
in another
another
war.
that the Federal Reserve might
taper
their $85
billion
peryet
month
The
Reserve
has
pushed
The Federal
Federal
Reserve
has not
not
yet
pushed
bond
buying,
the
Fed
decided
to
interest
rates
higher,
despite
the
rise
interest rates higher, despite the rise
of prices
prices
for
food and
and
fuel.
This
has
keep
thefor
spigots
open
and
sent
of
food
fuel.
This
has
continued
to hinder
hinder
the
returns
on
bond
prices
higher.the
Wereturns
entered
continued
to
on
bonds
and
interest-bearing
notes
for
the
year
interest
rates
bonds
andexpecting
interest-bearing
notes
for
clients
needing
income.
While
bond
clients needing
income.
bond
would
commence
theirWhile
ascent,
and
prices
have
started
to
head
south,
it
prices
have
started
to
head
south,
it
now that they have, we’ve further
has
opportunity
for
to
has created
created
anmaturity
opportunity
for us
us
to
reduced
thean
of the
bonds
pick
up
some
bonds
at
prices
not
seen
pick
up
some
bonds
at
prices
not
seen
we buy on your behalf to shorten
in years.
years. Particularly,
Particularly, municipal bonds
bonds
in
the
impact of risingmunicipal
interest rates
have
been
dropped
like
hot
cakes
have been
dropped
hot cakes from
from
over
the next
few like
years.
mutual
mutual funds
funds needing
needing to
to raise
raise cash
cash as
as
investors
have
started
to
bail
from
bond
investors
have
started
to
bail
from
bond
We also positioned portfolios going
funds. Our
Our strategy
strategy to
to limit
limit the
the impact
funds.
into
this year
believing
stocksimpact
of
falling
bond
prices,
if
possible,
is
of fallinghave
bond
prices,year;
if possible,
is to
to
would
a solid
however,
we didn’t expect the S&P 500 to
own individual bonds and hold them
ownupindividual
bonds
and
holdthree
them
be
over 19
percent
after
to maturity.
maturity. Therefore,
Therefore, maintaining
maintaining
to
quarters.
This paramount
harkens the saying,
good
good quality
quality is
is paramount and
and duration
duration
nobody
goes
broke
when taking
we
can
live
with,
generally
short.
we can live with, generally short. This
This
profits,
so strategy
don’t behas
surprised
successful
strategy
has
been the
the ifcatalyst
catalyst
successful
been
we
some ofincrease
the gains
off theinto
for
aa significant
in
for take
significant
increase
in referrals
referrals
into
table
before
We always
our
over
the
our firm
firm
over year-end.
the last
last year.
year.
endeavor to buy low and sell
high, and for certain areas of the
market
clear that
stocks have
Whileit isbond
prices
gotten ahead of themselves, so we’ll
have
tobuy
head
sell
into started
the greed and
on the
fear. For instance, the Consumer
south, it has
created
Discretionary
sector
stocks are
up
for the year, which
an28%
opportunity
for is far
better than the spending growth of
American
consumers.
us to pick
up some
bonds at prices not
All year long the most
seen
in government
years.
quoted
entity has to be the
Federal
Reserve
Bank.
The
The fine
fine balance
balance of
of owning
owning
stocks
stocks vs.
vs. bonds
bonds is
is paramount
paramount to
to
performance.
While
the headwinds
headwinds
We
don’t always
believe,
as goes
performance.
While
the
for
strong,
bonds
are
for bonds
bondssoare
aregoes
strong,
bondsbut
are we
January,
the year,
still
important
for
portfolios
by
stillknow
important
by
do
that for
youportfolios
don’t marry
providing
necessary
income
and
providing
necessary
income
and
your stocks. Similar to the overall
stability
principal.
While
stocks
stability of
of this
principal.
While
stocks
economy,
is a year
where
the
may
appear
to
be
Secretariat
in
the
may
appear
to
be
Secretariat
in
the
discrepancy between winners and
Belmont
compared
to
this
Belmont
compared
to bonds
bonds
this
losers
has
expanded.
This
creates
year, we’ll
we’ll continue
continue to
to use
use bonds
bonds
year,
atostock
pickers market
since not all
to protect
protect your
your downside
downside since
since
boats
are
rising
with
the
tide. Many
unexpected
unexpected events
events do
do occur.
occur. Enjoy
Enjoy
companies
arehas
performing
well,
the spring
spring that
that
finally arrived;
arrived;
the
has finally
and
nearly
all
of
your
stocks
have
we’ll
we’ll keep
keep focusing
focusing on
on your
your portfolio
portfolio
higher
thiscontinue
year than
without
winkers.
to
be
withoutearnings
winkers. We
We
continue
to last
be
year.
If
there
is
a
Santa
Claus
rally
grateful for
for your
your trust
trust in
in our
our service.
service.
grateful
this year, it will be the result of
solid spending during the holiday
season. Of course, if Santa Claus
should fail to call, bears may come
to Broad & Wall. Since the old joke
As a truly independent
Did you know...
investment management
If you are over 70 1/2, you can
and
planning firm,
make a Qualified Charitable
Carnegie
Investment
Donation directly
from your IRA
and
exclude
the
amount
your
Counsel has a richfrom
history
gross income (up to $100,000)?
of
providing careful and
The distribution can count towards
responsible
management
your RMD but
must be paid
directly
a qualified charity
of
yourto financial
assetsand
be completed before 12/31/2013.
toCall
reach
your short and
us or talk to your CPA for
long-term
goals.
more information.
For
For more
more info,
info, contact:
contact:
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or
or
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that economists have predicted five
of the last three recessions is mostly
true, we’ll work diligently so your
portfolio can be adaptable and
remain productive to meet your
financial goals.
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OH 44122
44122
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