The Pause That Refreshes... or Something More Sinister?

by Shawn Narancich, CFA Vice President of Research

A Pause that Refreshes? More than halfway through February, investors experienced a weekly loss in U.S. stocks for the first time this year. But a small pullback in blue chip equities masked potentially more troubling undercurrents. Release of the Federal Reserve’s minutes recalling details from its January meeting forced investors to confront the prospect of less accommodative monetary policy, namely the potential for our central bank to reduce quantitative easing prior to reaching its previously stated goal of reducing unemployment to the 6.5 percent level. To steal a phrase from JP Morgan CEO Jamie Dimon, the published debate amongst Fed officials appears to be a tempest in a teapot. Judging by yesterday’s CPI release showing the slowest rate of inflation since last July (at 1.6 percent), minimal pricing pressure appears far from that which would cause the Fed to take its foot off the gas in a race where unacceptably high unemployment has lapped the economy. As stock prices hesitate, the bond market appears to be confirming a default assumption of a slow growth, non-inflationary economy, evidenced by benchmark 10-year Treasury yields retreating back below the key 2 percent threshold. What fails to confirm a muted economic outlook, one likely to require additional monetary stimulus, is gold pricing, which has now fallen 6 percent so far this year and 12 percent since last fall.

Canary in the Coal Mine Consumers are facing a triple threat of higher payroll taxes, gasoline prices up 50 cents a gallon in the last month, and tax refunds delayed by the fiscal cliff debate at year end. If bellwether Wal-Mart’s quarterly earnings are any indication, these factors are beginning to weigh on consumer spending, the most critical driver of U.S. GDP. While earnings at the nation’s largest retailer beat expectations, Wal-Mart missed sales expectations and met bottom line estimates primarily because its tax rate dropped. Despite poor earnings quality, investors reacted warmly to an 18 percent dividend increase and management disclosure that sales had begun to pick up most recently. Nevertheless, America’s mass retailer of choice offered up expectations for flat sales in the current quarter, leading investors to question how lasting the apparent pullback in consumer spending might be. With the negative economic impact of sequestered spending cuts one week away, investors can be forgiven for thinking we are due for a more substantial pullback in a stock market experiencing its best start to a year since the early 1990’s.

Sell the Rumor, Buy the News Proving Wal-Mart’s mantra that low priced goods attract buyers, Hewlett Packard’s discounted stock price received a much needed boost after reporting better than expected sales and earnings following a series of well-publicized shortfalls over recent quarters. Despite reporting sales declines in every one of its divisions, the stock rallied over 12 percent on evidence that the company retains a heartbeat.  Based on upbeat management commentary, investors are left to conclude that CEO Meg Whitman and her team have finally lowered earnings expectations far enough that even a business in secular decline can clear the bar. One thing is for sure, spending on PC’s and printers is no longer a priority for either corporate America or the average consumer, a stark reality that will continue to challenge HP in a technology world now dominated by tablets and smart phones.

Next week, investors will see the last vestiges of Q4 earnings, book-ended by retailers like Target and Home Depot that have yet to report. Once again, corporate America has proven adept at under-promising and over-delivering, but earnings estimates for 2013 continue to moderate in a slow growth world.

Our Takeaways from the Week

• Stock prices finally paused as U.S. consumer spending slows

• After a decade long run, gold has become a notable underperformer

Disclosures

Brad Houle Hired as Senior Vice President

Ferguson Wellman is pleased to announce that Brad H. Houle, CFA, has joined the firm as senior vice president and member of the firm’s fixed income team.

With more than 20 years of experience in the investment management industry, Houle came to Ferguson Wellman after working for 17 years at Davidson Investment Advisors as co-portfolio manager for a large value dividend strategy and an intermediate-term fixed income strategy. Houle earned his Chartered Financial Analyst designation in 1999, completed an M.B.A. in business finance from the University of Oregon and graduated with honors from the University of Montana with a B.S. in business finance in 1991.

“Brad Houle brings a wide range of experience and a different perspective to the firm,” said George Hosfield, CFA, chief investment officer at Ferguson Wellman. “We are pleased to find someone with both investment experience and a desire to attract new clients.”

Bigger impact: fiscal cliff or renegade meteor?

by Ralph Cole, CFA Senior Vice President of Research

Currency War Devaluing one’s own currency is one of the easiest ways to stimulate a country’s growth.  By doing so, the products and services of your country become cheaper compared to those products and services of competing countries.  There is however, a great deal of risk associated with a weak currency policy. These risks include inflation, discouragement of foreign investment, not to mention the potential backlash from other nations.  A recent example of weak currency policy can be seen with Japan, whose currency has fallen 19 percent since October.

As a result, Japan is in the eye of the storm during this week's meeting of G20 Finance Ministers and Central Bank Governors. Following the country’s slow response to their 15 year bout of deflation (falling prices), Japan is now focused on causing inflation. They have the stated goal of expanding their monetary policy in order to rekindle growth in the moribund country.  While inflation often carries a negative connotation, a little bit can be a good thing.

The yen’s fall is even more staggering when you consider the actions taking place in the U.S. on the monetary front.  Furthermore, some emerging market countries (Brazil being the most vocal) are starting to push back against developed countries (mainly Japan and the U.S.) that have devalued their currencies. They are frustrated by the fact that their own currencies are appreciating against most of the developed world, therefore making their products and services less competitive.

While we don’t currently have a currency war on our hands, it is one of the bigger risks to global economic recovery going forward.  If countries begin to feel threatened by other’s devaluation, we would expect protectionist policies to begin to creep up, which would inhibit global growth.

Finally, in an environment with multiple central banks printing money, we would have expected gold to do better. However, up to this point gold is basically flat for the year.

"Bigger impact: fiscal cliff or renegade meteor?" That was the question Principal Mark Kralj posed to the audience at our Investment Outlook in Bend this week.   While the “fireball meteor” that rocked Russia this week is stealing most of the headlines, the fiscal cliff is starting to bite the consumer.  Earlier in the week the U.S. Commerce Department announced that retail sales in the U.S. inched higher by just 0.1 percent in January.  That was followed up by rumors from Wal-Mart that February sales were off to their slowest start in seven years (as a result the stock was down over 2 percent today).

The repeal of the payroll tax cut is starting to hit home for the U.S. consumer.  The 2 percent increase in the payroll tax will take approximately $126 billion out of consumers’ pockets this year.  For the average family this amounts to over $100 per month in decreased income. We expect this drop to affect retailers and restaurants at lower echelons.

It is however, unlikely that this slowdown in spending will lead to a recession, because of the positives occurring in the economy this year, including growth in housing, the stock market and jobs.

Our Takeaways from the Week

• Both the consumer and the stock market are taking a breather after robust runs
• Currency wars are a newer risk to the global recovery, and something that needs to be watched

Disclosures

Six for Six

by Shawn Narancich, CFA Vice President of Research

Six for Six

As a relatively upbeat fourth quarter earnings season enters late innings, stocks have maintained their upward momentum and generated nearly a year’s worth of returns in the first six weeks. Investors received relatively few new data points to inform their view of the economy’s progression this week, but we believe that a 7 percent rise in gasoline prices so far this year and higher payroll taxes could begin to bite. Consumer spending remains the biggest part of the U.S. economy, and with workers just now beginning to feel a pinch on their discretionary income, the likelihood of slower consumption will likely be seen in first quarter GDP. While construction spending and post-Hurricane Sandy inventory rebuilds are likely to help the economy early this year, government spending appears set to decline. If Congress fails to enact another workaround, $85 billion of sequestered federal spending cuts are set to take effect March 1, representing roughly one-third of expected GDP growth for the year. Given the government’s penchant for kicking the fiscal can down the road, we doubt whether this down-payment on deficit reduction is being factored into consensus estimates calling for 2 percent economic growth this year. 

Budgeting 101

The Congressional Budget Office (CBO) added fuel to fiscal debate fires this week when it projected continued federal budget deficits as far as the eye can see. While this forecast likely surprised few, what undoubtedly caused some to take notice is the fact that in the past five years, the country’s debt (excluding intra-agency holdings) as a percentage of GDP has doubled, from 36 percent of the economy before the financial crisis, to 72 percent currently. Financing the nation’s growing debt burden has arguably been eased by the Fed’s monetization of Treasury issuance, but with interest rates starting to rise, servicing the nation’s debt will become more costly. Investors are left to take heart in CBO estimates calling for the federal budget deficit of 2013 to fall below $1 trillion for the first time since fiscal 2008. Against this depressing backdrop, many on Capitol Hill are steeling themselves for sequestration, under the belief that federal spending needs to fall. With defense contractors set to suffer more than their proportionate share of the cuts, stocks such as General Dynamics, Lockheed Martin and Raytheon are underwater since year-end and notably underperforming a market (S&P 500) that is now up 6.5 percent year-to-date.

 Paybacks are #?%!

Hewing to the theme of government actions and private sector reactions, McGraw-Hill shareholders felt the pain caused by a $5 billion Justice Department lawsuit leveled against it, claiming the company’s Standard & Poor’s unit fraudulently rated collateralized debt obligations in the go-go years before housing crashed. The stock fell every day this week and cratered by a cumulative 27 percent on the tail risk that success from this and a raft of other state lawsuits accompanying it could put the company out of business. While McGraw-Hill clearly did a poor job rating subprime CDOs and other mortgage-backed securities, investors might ask whether competitors Fitch and Moody’s did any better. After all, neither of these ratings firms were charged. All of which leads a person to question whether Eric Holder & Co. are intent to extract their pound of flesh for S&P’s decision in 2011 to strip U.S. Treasuries of their AAA credit rating. While acknowledging its admittedly poor job of analysis preceding the last credit meltdown, S&P is arguably loathe to miss the next one.

Our Takeaways from the Week

• Stocks have now delivered nearly a year’s worth of returns in six weeks
• Federal budget pressures present rising headwinds for the economy

Disclosures

The Dow Hits the High Notes

by Shawn Narancich, CFA Vice President of Research

Dow 14,000

The Dow Jones Industrial Average became the latest blue chip equity index to signal the success that stocks have enjoyed so far in 2013, conjuring up images of the go-go days of the late 1990s and levels markets reached in 2007 prior to the financial crisis. Whether investors will once again be punished for participating in stock ownership at levels now within a few percent of all-time highs depends in part on how successfully the global economy deals with the continued deleveraging of mature economies, and how rapidly the faster growing emerging markets can pick up the slack. So far, so good. Commentary from fourth quarter earnings reports paints a reasonably constructive outlook for profits this year, aided by low unit labor costs, a relatively benign environment for commodity costs, and potentially better demand from faster growing economies in Southeast Asia and South America. Companies are cash rich and have erred on the side of caution, returning free cash flow to investors through dividend increases and share buybacks. Capital allocation strategies could change in 2013. For companies challenged to grow earnings in a late cycle environment, the pace of acquisitions could pick up at a time of reasonably priced equities and ultra-low interest rates. 

More Than Meets the Eye

Fourth quarter GDP was shocking at first blush, portraying an economy that contracted for the first time in three and a half years. Inventories dropped and government spending fell at the fastest pact since 1973, after unusually fast spending growth reported in the third quarter. Put those factors aside and the economy as measured by real final sales actually grew by 1.1 percent in the December quarter. While the government wouldn’t speculate about the magnitude of its impact, we know that Hurricane Sandy disrupted output in the Northeast, and rebuilding in the wake of that disaster is likely to help the economy early this year. Indeed, the monthly payroll report released earlier today supports the notion that our economy is moving ahead, albeit at a relatively slow rate probably not too far from 2 percent. That payrolls expanded at a rate of 157,000 in January is less surprising than the material revisions for November and December that retroactively added 127,000 jobs. Those revisions plus several others earlier in the year lead the Bureau of Labor Statistics to conclude that the U.S. economy created a net 181,000 jobs per month last year instead of the roughly 150,000 monthly average previously reported. Contrast the oft-revised payroll data with the purchasing managers index, a data series that isn’t revised after the fact and which portrayed manufacturing expanding at a pace that picked up from levels reported at year-end.

Black Gold

Another week, another intriguing development from the U.S. oil patch. Big Oil joined the ranks of companies reporting fourth quarter earnings this week, and while the numbers out of integrated giants Royal Dutch, Exxon Mobil and Chevron left something to be desired, the earnings out of independent refiners Valero and Phillips 66 were extraordinary. An old saw in the energy business observes that investors should buy straw hats in winter. In other words, the time to buy a refining stock would be about now, when earnings and stock prices often fall due to seasonally reduced gasoline demand and plant downtime used to prepare refiners for the summer driving season. Valero turned that common logic on its head by reporting quarterly earnings that nearly matched the previous quarter’s and surpassed even the most optimistic expectations. 

Credit Valero’s success to the U.S. oil boom. As it turns out, the glut of mid-continent crude oil that has advantaged refiners there with low cost feedstock for the past two years is now spreading to the GulfCoast, where Valero owns the majority of its refining assets.  The Seaway Pipeline (see map), which once was used to deliver imported crude oil to the Midwest, was reversed last year so that some of the Bakken Shale oil that was piling up in Cushing, Oklahoma could be delivered at a discount price to the GulfCoast, a key refining center.  As a result, neither Phillips nor Valero imported a barrel of crude oil in the December quarter, their refining margins skyrocketed, and our nation reduced its oil import bill.  Approval of the Keystone XL pipeline currently being contemplated by the federal government would not further reduce our oil import bill, but having an additional secure supply of Canadian crude oil would go a long way to promoting North American energy independence.

Our Takeaways from the Week

•  Stocks are on a roll as safe haven Treasury bonds lose ground
• The economy and corporate earnings continue to achieve forward progress

 Disclosures

Stocks on a Roll as Apple Sours

by Shawn Narancich, CFA Vice President of Research

Hear no Evil, See no Evil

As cautious investors continue to wait for a pullback to deploy cash on the sidelines, stocks continue to march higher, reflecting the US government’s latest attempt to kick the fiscal can down the road and surprisingly positive readings on the manufacturing sector globally. Despite our expectations for the payroll tax hike to dampen consumer spending domestically, the economy appears to be off to a reasonably good start so far this year. Blue chip US stocks have now gone four-for-four and are up 5 percent in 2013, rising each and every week of the New Year. Amidst increasing evidence that investors are rotating out of bonds and into stocks, Treasuries lost ground again, with yields on the benchmark 10-year security again pushing up against the 2 percent threshold.

 Adding Insult to Injury

A back-half weighted year, slowing sales growth, slimmer margins, and declining estimates -- investors are all too familiar with these conditions often associated with a company reaching maturity. However, in this case, the subject matter doesn’t involve once mighty tech titans Microsoft, Cisco, or Intel, but rather erstwhile growth company Apple. After already declining nearly 30 percent from its highs, Apple stock plunged another 12 percent Thursday following the release of disappointing sales and lackluster profits. And just like that, $60 billion of market cap disappeared.

 A Bad Apple?

That Apple’s sales growth slowed to 18 percent was not as shocking as the fact that its per share profits actually fell in the company’s December quarter, something that would have been considered heresy just months ago. Declining margins reflect a company struggling to manage a supply chain that was pushed to deliver enough inventory for Apple to sell 48 million iPhones and 23 million iPads in just 90 days. But factors beyond logistics are at play. Apple’s product mix has become less profitable, with telecom partners AT&T and Verizon Wireless reporting that an increasing number of new contract customers opted for older iPhone models.

Both market maturation and market demographics appear to explain Apple’s conundrum. First off, developed market smartphone penetration now exceeds 50 percent, so what might be called the “easy money” has already been made. New smartphone customers being signed up now are arguably less tech savvy and more price sensitive, so they are less willing to spend $200 for the latest iPhone 5 when a perfectly acceptable iPhone 4 can be had with a 2-year contract for free. Just as importantly, the huge potential to sell iPhones in emerging markets is complicated by the fact that fewer customers there make enough money to buy one, subsidized or not. Finally, and in a related vein, Apple is losing market share to the less expensive Android architecture delivered through competitors like Samsung, which offers competitively priced phones that carriers often prefer because of a lower subsidized cost.

We believe that Apple is working on lower-end devices to build market share, especially in international markets. However, those phones won’t be as profitable to sell. With diminished growth prospects, the onus is now on Apple to begin returning more of its prodigious cash flow to shareholders – through either share buybacks or a dividend boost.

 Earnings Intense

While Apple was the headline act, tech companies took center stage during a week when hundreds of companies reported fourth quarter numbers. Profits continue to beat expectations by a margin similar to Q3, but the proportion of company’s delivering sales above estimates has improved. In an example of maturing tech done right, Google’s stock rallied on news of slower erosion in the price that advertisers pay the company for clicking on Google-driven ads. Behind better than expected mobile ad pricing is the fact that both tablet and smartphone clicks more than doubled in Q4, reflecting people’s increased comfort with transacting in the wireless realm. Evidence that Google is successfully navigating the transition from PC to mobile search is a key reason why the stock rose 7 percent on the week.

Hundreds of companies across industries will report on a daily basis next week in what we expect will be the heaviest week of the fourth quarter earnings season. The Fed will also convene its first meeting of the year, the result of which we expect will be communication indicating a continuation of the quantitative easing programs instituted last fall.

 Our Takeaway from the Week

• Encouraging macroeconomic data and acceptable earnings results continue to put a bid into stocks

Disclosures

Resilience in the U.S. Economy, Further Contraction in the Eurozone

by Shawn Narancich, CFA Vice President of Research

Three for Three

 Encouraging economic data and an acceptable undertone to fourth quarter earnings underpinned the new year’s third consecutive week of stock gains, amid increasing evidence that retail investors are returning to the equity market. Mutual funds flow data showed investors once again adding cash to equity funds, a report that probably helps to explain another 1 percent gain in blue chip stocks despite ongoing concerns about U.S. fiscal policy and a flare-up of terrorist violence overseas. As investors speculate about the degree to which recent tax hikes will slow the economy, bond markets appeared to acknowledge the reality of a slow growth, low inflation environment by bidding Treasuries higher for the week.

Yen and the Yang

 Resilience is probably the best adjective we can use to describe a U.S. economy that continues to display evidence of forward momentum following Hurricane Sandy and the contentious fiscal cliff negotiations. From retail sales in December that outgrew expectations during a key seasonal period to the best housing starts number in four and a half years, the consumer continued to propel economic output at year-end. A key question is what consumption numbers will look like in the new year once workers experience firsthand the drag on their paychecks caused by expiration of the payroll tax cut. Despite the spending headwind created by higher taxes, the consumer discretionary stocks remains near the top of the sector performance charts year-to-date. The wealth effect of rising home prices, higher 401(k) balances, and lower gasoline prices are ameliorating factors that help explain why these stocks continue to do so well. 

While the U.S. economy continues to push ahead, Europe is at the other end of the spectrum, highlighted by further contraction in Eurozone industrial production and German GDP that finally fell into the red. Investors are well aware that the Eurozone is in recession, but the fact that it isn’t going out of business has so far been enough to support stock prices. What isn’t helping Europeexit recession is a resurgent euro, the common currency that has quietly risen from the low $1.20s last summer to $1.33 now. As developed economies struggle to support slow growth with expansionary monetary policy, major currencies are running a de facto race to the bottom that the euro is currently losing. Now, Japan’s new administration is staking its claim. With a yen that has quickly hit two and a half year lows against a dollar that has already lost ground to the euro, European exports suddenly look a lot more expensive to customers in two of the world’s three largest economies. Only time will tell how much deeper and longer a strong euro might make the Continent’s ongoing recession.

How’s Business?

As the interaction of currency markets impacts key economies, banks dealing primarily in U.S. dollars demonstrated the benefits of mortgage loan growth and better capital markets. Goldman Sachs, Morgan Stanley, and a host of regional banks delivered better than expected fourth quarter earnings and, despite the headwinds of rock-bottom interest rates that are pressuring margins, the outlook for this year remains reasonably constructive. In contrast, chip making giant Intel reported lowers earnings and warned that a declining PC market will continue to weigh on results in 2013. Investors turned tail and sent stock of the world’s largest semiconductor manufacturer down by a cool 6 percent.

With 15 percent of the S&P 500 having reported so far, about two-thirds of companies have exceeded earnings estimates. The pace of fourth quarter reporting picks up next week, with approximately one-fourth of the S&P 500 delivering results.

Our Takeaways from the Week

• Stocks continue to make forward progress amid fiscal headwind
• Earnings season is off to an encouraging start

Disclosures

Stocks Two-for-Two in 2013; Telecom Faces Headwinds

by Shawn Narancich, CFA Vice President of Research

Two-for-Two

On modest gains for the second consecutive week of the new year, large-cap U.S. stocks rose to a five-year high and are pushing up against levels reached prior to the global financial crisis of 2008. An old saying in the industry observes that stocks climb a wall of worry, and that characterization has never been truer as blue-chip stocks approach all-time highs. Investors were surprised to see the U.S. trade deficit increase by $6 billion in November, but a key trend of reduced oil imports remains in place, and slower exports late last year probably had more to do with port disruptions caused by Hurricane Sandy. Nevertheless, economists will likely reduce their fourth quarter GDP estimates because of a bigger trade drag. For 2013, we continue to expect that our economy will slog ahead at a 2 percent rate. 

A European Job Is Tough to Come By

Perhaps more meaningful, Europe confirmed that its economy remains well entrenched in recession, as it reported a new all-time high unemployment rate of 11.8 percent. But Mario Draghi quashed any speculation that Europe’s central bank would do more to help pull the Eurozone out of its funk, stating that it had no intention of lowering interest rates any further or engaging in quantitative easing. Predictably, the euro rallied, as it remains one of the few global currencies not being debased by monetary stimulus. For now, a disruptive break-up of the European Union seems less likely. Despite the Continent’s economic woes, taking Eurozone Armageddon off the table has been enough for investors, who have piled back into European stocks specifically and international stocks in general.

 Global Warming Anyone?

Whether the rally in Chinese stocks continues may depend on the cadence of inflation reports to come. After enjoying a long spell of disinflation, China reported that the price level rose in November rose at its highest rate in seven months. While 2.5 percent inflation is unlikely to prompt the People’s Bank of China to reverse its easy money policy, the likelihood of any further monetary easing by the Red Giant has diminished. The root cause of recent price increases?  China’s coldest winter in three decades, which has stunted crop production and boosted food prices. Export data out of China this week was surprisingly strong, and recent iron ore price increases are symptomatic of the world’s largest user replenishing depleted stockpiles. Despite the recent uptick in inflation, China’s economy appears to be re-accelerating.

Choppier Seas in Telecom

After outperforming the market last year, the U.S. telecom industry faces rising headwinds in 2013. The cadence of news flow from this sector has picked up notably, with Verizon declaring this week that it enjoyed record post-paid subscriber gains in the fourth quarter. The result? Wall Street analysts rushed to reduce their quarterly estimates to account for higher losses on smart phone subsidies used to attract new customers. AT&T also appears to have experienced robust smart phone uptake as both carriers sold a lot of new iPhone 5s before Christmas.

But beyond these shorter term issues, the telecom industry appears to be standing on shakier ground. Starting with last fall’s announcement that Deutsche Telecom’s U.S. subsidiary T-Mobile would acquire pre-paid specialist MetroPCS Communications in a complex deal, Japanese telecom pioneer Softbank agreed to acquire Sprint. Bankrolled by deeper Japanese pockets, Sprint in turn tendered for the 50 percent of broadband network owner Clearwire it doesn’t already own, in a bid to bolster its class b network. As if that wasn’t enough excitement for this normally staid sector, satellite TV maverick Charlie Ergen won approval late last year to convert satellite airwaves into more valuable cell phone spectrum, then this week launched its own bid for Clearwire at a price substantially above Sprint’s offer price. Whether Ergen’s Dish Network is truly attempting to become a new wireless operator in the U.S. or is just posturing to maximize the value of its spectrum remains to be seen.

Finally, AT&T is ramping up its capital spending to increase the quality of its 4G service. All this industry activity in such a short time period appears to be more than just coincidence, symptomatic of a wireless industry that is jockeying for position at a time of slowing subscriber growth and heightened competition. So while the juicy dividends of AT&T and Verizon remain attractive, telecom could be challenged to repeat last year's strong performance.

Next week, fourth quarter earnings kick into high gear, with 13 percent of the S&P 500 scheduled to report. Following Wells Fargo’s earnings released earlier today, money center banks Citigroup, Bank of America, and JP Morgan will report, as well as industrial bellwether GE.

Our Takeaways from the Week

•  Stocks added to recent gains as the first big week of earnings awaits
•  The telecom industry faces tougher sledding in 2013

 Disclosures

Fiscal Cliff Band-Aid, Budget Woes and Retail Lows

by Shawn Narancich, CFA Vice President of Research

Problem Solved?

The cliff is bridged, but the span is short, and daunting canyons remain to be crossed. A deal to avert across-the-board tax increases and immediate spending cuts prompted a nearly 3 percent rally on Wall Street, as traders betting against a last minute agreement scrambled to cover their short positions. As stocks shot higher, Treasuries lost a safe-haven bid and prices fell meaningfully, pushing yields on the benchmark 10-year bond to within shouting distance of 2 percent. Nevertheless, the 2012 Taxpayer Relief Act does relatively little to address the nation’s underlying deficit and debt problems. With sequestered spending cuts having been deferred by two months and Congress once again rescinding cuts to doctors’ Medicare reimbursements, federal spending continues largely unabated.  And although tax revenues may rise because of higher marginal tax rates for top earners, the sad fact remains that our U.S. government brings in only about $7.00 of revenue for each $10.00 it spends. 

Budgeting 101

The Treasury is now pulling unusual levers to keep funding itself because the nation has already reached its $16.4 trillion debt limit. So with the thorny issue of entitlement reform still unresolved, the question is whether this third rail of U.S. politics will finally be addressed. Without entitlement reform in an economy growing at 2 percent, the prospect of balancing the budget and arresting further substantial growth in the national debt is dim. In approximately two months, the Treasury will run out of rabbits to pull from its hat, so either Congress will legislate a higher debt ceiling or large portions of the government will shut down for lack of funding. Therefore, a key risk for equity investors is that political negotiations herein promise to be rancorous, putting spending cuts back on the table in exchange for votes to raise the debt ceiling. 

A Lump of Coal for Retailers?

Yes, it’s about that time again, and earnings season will take place against a fourth quarter backdrop that witnessed dislocations from Hurricane Sandy and increasing concerns by businesses and consumers about fiscal austerity. As such, earnings in an environment where estimates have been falling present another risk for equity investors. Investors gleaned some more clues about the economic backdrop for earnings following December sales reports out Thursday. Same-store sales at key retailers rose by 4.5 percent, but a mid-month lull appears to have forced them to accept lower prices in exchange for volumes. Target sales fell flat on a disappointing Neiman Marcus collaboration and Kohl’s cut earnings numbers despite beating top-line expectations. Bricks-and-mortar retailers appear to have been challenged by a post Black Friday lull, which challenged their ability to keep shoppers engaged over an unusually long holiday shopping season marked by another market share grab by online retailers. Best Buy is a good example. It serves as a de facto showroom for consumers who then buy from the likes of Amazon, which sells many of the same items for a price sans the cost of storefronts. Best Buy’s stock has lost almost half its value over the past year as its profitability has evaporated.

Wall Street trading desks return to full strength next week after a two-week holiday lull and investors will pay close attention to Alcoa’s earnings release, parsing its report for clues about how fourth quarter earnings will unfold.

Our Takeaways from the Week

• An eleventh-hour fiscal cliff deal helped produce a strong start to the year for equities
• Key fiscal issues remain unresolved, and with earnings season about to begin, markets are likely to be volatile

Disclosures

How the Compromise Affects Taxpayers … and the Economy**

With a fiscal cliff compromise just signed by President Obama, investors breathed a sigh of relief yesterday, bidding up stocks over 2 percent and sending bond yields up. The bill, H.R. 8: American Taxpayer Relief Act of 2012, covered many provisions of the tax code, but the major changes that high-income Americans will see in 2013 compared to 2012 include:

• A top income tax rate of 39.6 percent for individuals above $400,000 and for those with joint taxable income over $450,000
• A permanent Alternative Minimum (AMT) patch. The exemption amounts are now $50,600 for individuals and $78,750 for households, and indexes the exemption and phaseout amounts thereafter
• A top capital gains tax and dividend tax of 20 percent for income above the same amounts listed above
• Phaseout of exemptions and deductions for adjusted gross income above $250,000 for individuals and for those with joint taxable income over $300,000
• Expiration of the payroll tax cut, increasing the payroll tax rate by 2 percent on the first $113,700 of income
• The $5 million estate, gift and generation-skipping transfer tax for individuals and $10 million for households is now indexed to inflation, but sets the top estate tax rate at 40 percent

These tax increases, combined with the sequestration spending cuts to take effect on March 1, will result in a roughly 1.5 percent hit to GDP in 2013. Despite this austerity, the federal budget will still run in the red, increasing the U.S. national debt level. While the cliff crisis has been temporarily averted, politicians will deal with the sequestration budget cuts and debt ceiling limit over the next two months. The drama is definitely not over.

Even though GDP growth will be below long-run trend, the austerity measures may be coming at a relatively good time. With the housing market turning as well as oil and gas spending ramping up, economic growth should still be able to post 1 to 2 percent in gains. Corporate profits should therefore remain healthy, potentially resulting in gains for equities. Besides the political drama, our main concern in 2013 will be consumer spending. With the expiration of the payroll tax and the increase in taxes on higher incomes, the federal government is taking money out of consumers' pockets. Against this backdrop, the Federal Reserve continues to keep the financial system awash in cash, which should continue to provide some monetary stimulus in the face of fiscal austerity.

While interest rates are trading at the higher end of their recent trading range, we still believe rates will remain lower, longer due to slow economic growth and continued Fed stimulus. We will continue to maintain our bond positions while Washington still grapples with the remaining “cliff” issues on the table.

**Any tax information in this communication is not intended or written by Ferguson Wellman Capital Management to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any matters addressed herein. And advice in this communication is limited to the conclusions specifically set forth herein and is based on the completeness and accuracy of the stated facts, assumptions and/or representations included. In rendering our advice, we may consider tax authorities that are subject to change, retroactively and/or prospectively, and any such changes could affect the validity of our advice. We will not update our advice for subsequent changes or modifications to the law and regulations, or to the judicial and administrative interpretations thereof.**

The information provided herein is for educational purposes only and should not be construed as investment advice or as an offer or solicitation. Not all securities are suitable investments for all investors; therefore, Ferguson Wellman Capital Management will not necessarily implement any particular strategies discussed herein for all clients. We recommend that you discuss questions regarding your individual portfolio and investment strategies with your portfolio manager.

Cole discusses how fiscal cliff negotiations affect confidence

In a recent Bend Bulletin article, reporter Elon Glucklich covers the risk Oregonians face if lawmakers allow the U.S. to go over the fiscal cliff. In addition to spending cuts, and tax increases, Ferguson Wellman’s Ralph Cole, CFA, states that when investors seek the government struggling to make a decision, it becomes a capital markets event. The full article can be read on Ferguson Wellman’s website.

Disclosures

Housing High and the Government Cliffhanger

By Ralph W. Cole Senior Vice President of Research

There’s No Place Like Home

Good news came this week when Standard & Poor’s Case-Shiller Home Price Index reported that national home prices increased 4.3 percent on average through October. 2012 is on track to be the first year of positive home price appreciation since 2006. Housing has been in bear-market territory since that time—this increase in prices is certainly a long-awaited, welcome development.

In 2012 we found a new equilibrium on supply and demand for housing. New household formations (demand) has risen from its lows to exceed new home construction (supply), resulting in a modest bump in house prices. In addition to supply and demand shifting, the housing market is benefitting from a 65-year low in mortgage rates. This week, 30-year conforming loans were quoted at 3.125 percent, prompting borrowers to ask, “How low can you go?”

We expect housing to remain one of the bright spots in the U.S. economy as we inch toward 2013. Housing starts are forecast to surpass 1 million next year, up from 475,000 in 2008, but still a long way to go from the high of 2 million we saw in 2005. Job creation from new home formation is significant for construction but also for manufacturers of goods and services associated with a new household—think carpeting, furniture, appliances, lawncare, etc. The lack of homebuilding the last five years has been a significant driver of unemployment. We expect improvements in employment in 2013 will be directly correlated to growth in housing starts.

Cliffhanger!

The unfortunate part of this “Kabuki-theater drama” is that it was so predictable. As we have noted in past publications, markets stop panicking when politicians start panicking.  It appears on the eve of the “fiscal cliff” that politicians are indeed starting to panic. The House of Representatives will be hosting a special session on a Sunday night, December 30, to hopefully vote on a deal. Outcomes range from a 30-to-90-day extension of current policy (really?) to extension of Bush-era tax cuts for all with the exception of individuals earning more than $500,000 annually.

As a firm we view the entire situation as truly unfortunate. At this moment, the U.S. has an opportunity to re-establish itself as a leader in the global economy. Before this can occur, our government needs to show the world that we are capable of addressing our short- and long-term fiscal issues. The U.S. also needs to prove to rating agencies its resolve to face these enormous fiscal challenges. As of this writing, neither side of the aisle has shown the leadership to successfully put forth a solution.

Our Takeaways for the Week

• Despite positive economic data, the overhang of fiscal cliff negotiations weighed on the S&P 500, which was down 1.9 percent for the week
• U.S. bonds have maintained their safe-haven status with the yield on the 10-year Treasury falling to 1.69 percent

Disclosures

A Santa Claus Rally and Teflon Don Economy

by Shawn Narancich, CFA Vice President of Research

A Santa Claus Rally Preempted

Time is fast running out for politicians attempting to avert the fiscal cliff. Lack of a cross-party deal now complicated by a surprising lack of intra-party consensus dampened investors’ spirits, sending stocks lower on Friday and shrinking gains realized for the week. Bond yields rose modestly, but benchmark US Treasuries remain in a trading range yielding relatively little. With Congress now on break until after Christmas, any deal to avert the fiscal cliff is likely to be less meaningful than the Grand Bargain previously envisioned. 

A Teflon Don Economy

With fiscal uncertainty growing and the economy negatively impacted by Hurricane Sandy, investors might think that the US economy would struggle to keep its head above water. In fact, data argue the opposite. Retail sales reports remain relatively upbeat, manufacturers in the Northeast are reporting growth, personal income and spending are up more than expected, and housing continues to rise above the fray. All of which is to argue that despite Washington’s best efforts to put a lump of coal in everyone’s stocking this Christmas, the economy not only continues to grow, but probably is doing so at a fourth quarter rate underestimated by economists. More importantly, aggregate demand that has been delayed because of tax and government spending uncertainty appears to offer the potential for economic acceleration if the government’s solution does more than just kick the can down the road. Therein lies the opportunity and the risk for investors.

Business as Usual?

One bellwether company reporting earnings this week proved that business can actually thrive despite the fiscal handwringing. Oracle blew past Wall Street expectations for earnings while handily beating revenue estimates, and then proceeded to tell investors that business in December has actually been quite good for its suite of database and application-specific software packages. Oracle’s report is juxtaposed against a consensus belief that technology budgets are under pressure and likely not to experience year-end budget flushes, prompting the question of whether Oracle’s experience reflects market share gains or a consensus outlook that is off kilter. Whatever the reason, Oracle’s stock performed admirably in choppy markets, rewarding shareholders with nearly a 6 percent gain for the week. 

Sports apparel and footwear giant Nike also regained some lost luster. The stock gained 8 percent on better-than-expected earnings, reflecting less pronounced margin headwinds and a robust U.S. business. Nevertheless, despite accumulating evidence that the Chinese economy is improving, Nike’s orders in this important market continue to lag. Trading at 20 times projected earnings, the company’s stock already appears to presume success in overcoming challenging markets overseas.

Ahead of what should be one of the quietest weeks of the year for Wall Street, we wish all of our clients and friends of the firm a very Merry Christmas and a prosperous New Year!

Our Takeaways from the Week

• Surprisingly sound economic data and encouraging earnings reports suggest an economy growing at a faster-than-expected rate
• Despite surprisingly strong performance recently, stocks are likely to remain volatile on fiscal cliff newsflow

 Disclosures

George Hosfield, CFA, responds to recent data about employers giving more year-end bonuses

Northwest NewsChannel 8’s Joe Smith talks with George Hosfield, CFA, principal and chief investment officer, about how employers are recognizing and rewarding workers. Hosfield also comments on the possibility of more hiring by employers in 2013.  Click here to view the news story.

Disclosures

QE4 and Good news from Europe?

by Shawn Narancich, CFA Vice President of Research

 A Game of Chicken

Politicians failed to make any headway on the U.S. fiscal cliff, but with only 18 days to go, stocks are holding up relatively well in light of additional monetary stimulus announced by the Fed and more evidence that China’s economy is reaccelerating. In contrast to modest losses in domestic blue chips stocks, emerging market equities rallied 1.6 percent and provided a nice tailwind to investors owning international stocks in general. Though international equities lagged domestic benchmarks by notable margins throughout 2012, after a strong rebound in recent weeks, both equity styles are now up 13 percent for the year. With global equity indices mixed, benchmark U.S. Treasuries sold off modestly on news that the Fed will ring in the New Year by expanding their balance sheet an additional $45 billion per month.

QE4 Investors expected the additional quantitative easing, but what caught most by surprise was the Fed’s announcement that it was dropping reference to any calendar restraints on its open market operations in favor of instituting explicit macroeconomic targets. The yield curve grew steeper on news that monetary largess would remain in place as long as projected inflation remains quiescent and unemployment remains above 6.5 percent. The Fed’s announcement had some asking the question, “Does this mean monetary policy is now partly beholden to the U.S. Bureau of Labor Statistics?”  Probably not.  The Fed’s post-meeting statement disclosed that Bernanke & Co. would consider drops in the unemployment rate caused by people giving up their search for work to be one of the contingencies that would preclude it from prematurely raising rates.

Its latest moves come in addition to the $40 billion of mortgage backed securities it is already purchasing, putting our central bank on track to add $85 billion of liquidity to bank balance sheets every month. While the monetary base expands, we question how many more loans banks will actually make with their additional cash reserves, and more broadly, whether additional monetary stimulus will produce the incremental jobs targeted by the Fed. One thing seems certain -- the Fed’s new communication strategy promises to make each month’s employment and inflation statistics that much more meaningful in divining central bank policy.

Good News from Europe? While the Fed continues to do its best to ensure that the U.S. economy doesn’t end up like Japan’s, a meeting of Euro-zone finance ministers made key progress in its attempt to backstop the region’s banking system. Leaders announced broad new powers for the European Central Bank to supervise the Continent’s biggest banks, granting the ECB regulatory oversight similar to that enjoyed by the Fed.  Just as importantly, this agreement will enable the European Security Mechanism Bailout Fund to make direct investments in large banks without first lending money to regional governments already saddled with too much debt. In combination with ECB President Draghi’s promise this summer to backstop the bond markets of troubled southern European nations, this latest pronouncement should further reduce systemic risk in the region and promote healthier capital markets in general.

 Our Takeaways from the Week

• International stocks outperformed on regulatory progress in Europe and further evidence of an economic rebound in China

• Odds of a meaningful year-end deal to avert the fiscal cliff appear to be waning

Disclosures

More Fiscal Cliff Woes, LNG and Operation Twist

by Shawn Narancich, CFA Vice President of Research

Marking Time

In a week when investors were expecting the monthly jobs and manufacturing reports to reflect Hurricane Sandy disruptions, weather wasn’t blamed for the disappointingly low level of manufacturing activity, nor did it seem to hinder the surprisingly strong payroll report. While a net gain of 146,000 jobs in November was a pleasant surprise, the unemployment rate fell for the wrong reason. A four-year low of 7.7 percent resulted from an estimated 350,000 people dropping out of the labor force, as discouraged job seekers stopped searching for work. In manufacturing, the storm that blew through was not produced by Mother Nature, but rather by the politicians in Washington who still have yet to resolve the “fiscal cliff.” As businesses hunker down, they are ordering less and hiring fewer. Against this mixed backdrop of economic indicators, stocks and bonds finished the week largely unchanged.

LNG Boosters Receive Key Endorsement

Natural gas also failed to advance despite the results of a widely anticipated report from an economic consulting firm that supports the case for liquefied natural gas (LNG) exports.  Free market advocates cheered the Department of Energy-commissioned study concluding that LNG exports would boost economic output and create jobs without a disproportionate increase in prices. Environmental reviews of such exports are still ongoing, and while the DOE won’t decide on permitting until the first half of next year, this week’s report is a key input to the agency’s ultimate decision. Despite the potential demand boost from natural gas exports, the commodity succumbed to selling pressure on Friday because forecasts are predicting warmer than normal weather that threatens to reduce seasonal heating demand. Following last year’s winter that wasn’t, traders are keeping prices under wraps as they weigh increasing industrial demand for gas with evidence that supply from curtailed drilling will soon impact production levels.

Strategic Flip-Flop

Sticking with an energy theme, the shale bonanza that first sent natural gas prices plummeting had a similar but much more immediate impact on Freeport-McMoran’s stock, which cratered on news that it would purchase Plains Exploration and the portion of McMoran Exploration that it doesn’t already own. After making a decision in the early 1990s to ditch the energy business in favor of its bread-and-butter copper and gold mines, management shocked investors by announcing the twin deals worth a combined $20 billion. Investors fled the stock in droves, sending the large-cap miner’s stock down over 20 percent for the week. As if the strategic about-face wasn’t enough, eyebrows were raised further upon revelation that Freeport’s CEO owns material positions in both Plains and McMoran, and that neither deal is subject to shareholder approval. The end result is that Freeport goes from being a pure-play miner to a BHP Billiton-like natural resources conglomerate, with a balance sheet burdened with five times as much debt.

On tap next week is the Federal Reserve’s last meeting of the year, at which investors hope to learn what kind of encore might await the end of Bernanke and Co.’s bond buying and selling program, dubbed “Operation Twist.” Expectations are that the Fed will continue buying long-term Treasuries to keep rates low, without sterililzing those purchases with sales of other securities. If so, monetary policy is set to become even more stimulative.

Our Takeaways from the Week

• Fiscal cliff uncertainty continues “ad nauseum” as markets await resolution
•  Odds of LNG export approval increased as a key study highlighted the potential economic benefits

Disclosures

Fiscal Cliff Posturing, Kicking the Can and "Special" Dividends - Week Ending 11/30/12

by Shawn Narancich, CFA Vice President of Research

A “He Said, She Said” Kind of Market

In a week when stock prices swung back and forth based on press conferences and proclamations about ongoing “fiscal cliff” negotiations, investors are left to conclude that markets are being held hostage to politics. Against this backdrop, stocks struggled to gain traction and benchmark Treasuries remained well bid. The fiscal uncertainty weighing on investors continues to manifest itself in the real economy. Notwithstanding an upwardly revised third quarter GDP number, details underlying the 2.7 percent growth rate point to a low quality recast. A large portion of the improvement came from inventory builds greater than first estimated, while both consumption spending and private sector investment were weaker than first thought. 

It’s Not What You Make, It’s What You Spend

Another detail in this week’s GDP report is worth mention – a lower-than-expected trade deficit for third quarter that subtracted less from the economy than first thought. We know that the U.S. economy is beginning to benefit from a recovery in housing, but what gets less press is how the renaissance of the U.S. energy industry is reducing our nation’s oil import bill. With half of our trade deficit currently attributable to oil imports, the shale boom that is boosting domestic oil and gas supplies promises to increase U.S. energy self sufficiency and create economic tailwinds. Investors are wise to discount fiscal contraction, but the Fed-engineered housing rebound and Yankee-inspired energy rebirth promise to provide key offsets to an otherwise sluggish U.S. economic outlook.

A Well-Worn Can

As fiscal cliff posturing continues to play out domestically, Europe congratulated itself on a new agreement to keep Greece solvent. The latest bailout package defers principal repayments, reduces interest rates, and approves another cash advance to this country whose economy continues to implode. Slowly but surely, Greece’s disastrous economy is washing up on the balance sheets of countries like Germany and France, where taxpayers will ultimately foot the bill for Greece’s transgressions. For now, that battered can is again kicked down the proverbial road.

A “Special” Year

While corporate executives may not be able to forecast the details, they know that tax rates are likely to rise, and with this knowledge, they are speeding the return of capital to shareholders. So far this year, U.S. companies have declared over 170 “special” dividends, which are cash payouts in addition to the typical quarterlies that have in many cases also been increased in 2012. This week, Costco, Las Vegas Sands, Guess and Whole Foods Market joined the parade, aiming to make payouts advantaged by a low 15 percent dividend tax rate likely to end soon.

The economic calendar picks up pace next week, when investors will glean the latest read on U.S. manufacturing and labor markets, key readings that may put additional pressure on policymakers to resolve the fiscal cliff.

Our Takeaways from the Week

•  Posturing over the fiscal cliff took center stage as stocks struggled to advance
• The U.S. economy remains in slow-growth mode, but with important underlying supports that should help ameliorate increasing fiscal headwinds

Disclosures

Black Friday 2012

by Shawn Narancich, CFA Vice President of Research

 Black Friday? Unexpected comity by politicians aiming to avert the U.S. fiscal cliff put investors in a better mood ahead of Thanksgiving, and enthusiasm for stocks carried over to a holiday shortened trading session on Friday. After several weeks of post-election malaise and with just 39 days left to resolve the automatic spending cuts and tax increases slated to take effect January 1, stocks rebounded 3.5 percent on the week as benchmark Treasury bond prices waned.

Sparsely populated trading desks and light volumes signaled a start to the Christmas selling season, when shoppers thronged storefronts ahead of late night openings designed to create buying frenzies and fat retail profits. While investors will parse initial reports of Black Friday sales for indications of company-specific success or failure, the end game is harder to predict nowadays. With increased use of the internet and more stores offering online deals to rival in-store specials, more shoppers are choosing to sleep in and avoid the crowds, opting instead to make purchases on their computers, tablets, and smartphones. As a result, online sales continue to take market share from bricks-and-mortar retail. Inasmuch as shoppers visit Amazon.com or Target.com instead of venturing out, traditional retail could be losing out on the all-important impulse purchase. Retailers like Wal-Mart and Macy’s count on these and other full-priced sales to make enough money to offset losses incurred on their “door buster” specials. So while holiday sales may reach the 4 percent gains anticipated by investors, we won’t know until much later in the season how promotional these added sales turned out to be.

From Bad to Worse In a relatively light week of corporate news, disappointing earnings from Hewlett-Packard sent more of its investors fleeing for the exits. Quarterly earnings beat estimates, but only after excluding a laundry list of non-recurring charges, the most significant of which was an $8.8 billion write-down of the goodwill it booked in purchasing U.K. software firm Autonomy. Amid allegations of accounting impropriety, investors were left to believe that former CEO Leo Apotheker and his management team were duped into the purchase, leaving current CEO Meg Whitman to pick up the pieces of a company whose stock has now lost over half its value this year. Ironically, reported sales of software represented the only division of sales growth within HP, but even at that, this business accounts for a small portion of overall sales. Looming as much larger issues standing in the way of an HP turnaround are declining sales of PC’s, servers, storage, printers and ink.  Technology trends favor tablet computing, smart phones, and virtualized workloads accessed in the cloud, leaving HP to face secular headwinds that show no signs of abating.

An Asian Bright Spot Investors have had to take recent economic data in the U.S. with a grain of salt, as the effects of super storm Sandy continue to skew readings of weekly unemployment claims, retail sales, and industrial production. As a result, foreign data flow has become more meaningful in gauging global economic health. Notwithstanding the occasional nugget of good news, Europe continues to be a macroeconomic problem, as evidenced by last week’s data confirming that the Continent is officially in recession. As lawmakers there attempt to cobble together the latest bailout package for Greece and wrangle over a new EU budget for the next seven years, trading partner China appears to be rising above the fray. Amid data showing stronger electricity demand and better industrial production numbers, a preliminary reading of Chinese purchasing managers now indicates manufacturing growth there for the first time in 13 months. What all of this could indicate is that the Red Giant may end up being a savior of sorts for economic growth next year. If China can continue its nascent transition to a more consumer oriented economy, global growth in 2013 could actually reach the 3-4 percent level that many economists expect.

Our Takeaways from the Week

• Stocks rebounded amid optimism for a solution to the impending fiscal cliff

• While the global economy remains lackluster, China’s expansion appears to be picking up and could help deliver anticipated global growth in 2013

Disclosures

Around the World and Back

By Ralph W. Cole Senior Vice President of Research

Around the World and Back I had the opportunity last week to travel to Hong Kong and Mumbai and meet with investment industry experts. Both economies appear to be improving, or at least, bottoming.

The Chinese have a fascinating process of selecting their new government leaders. While jockeying goes on for years in advance, the final selection process takes approximately a week behind closed doors. The announcement is made as the new regime takes the stage in The Great Hall of the People in Beijing. The country is literally waiting and watching to see who comes out on to the stage, and in what order. The seven members were led by Xi Jinping, who is the new President. Xi Jinping is viewed as somewhat of a reformist, but overall the seven member group is viewed as conservative, and reforms will continue at a slow pace. This selection process takes place once every ten years, which allows the Chinese government to be a little more strategic than ours here in the U.S.

As we all know, democracies can be messy, and while India’s is messier than most, they are making real progress. In the last couple of months India has passed pro-growth initiatives including: companies’ bill for improved corporate governance, and the allowance of foreign direct investment in aviation, multi-brand retail, insurance, broadcasting and power exchanges. Management teams in these industries will improve profitability, but more importantly, drive infrastructure improvements throughout the country. Several more government actions are expected to take place in the coming quarters.

Man Bites Dog The International Energy Agency said the U.S. will overtake Saudi Arabia as the world’s leading oil producer by 2017 and become a net exporter by 2030. The IEA went on to say that natural gas will surpass oil as the largest fuel in the U.S. by 2030. We have written extensively about the shale oil and gas revolution ongoing in the U.S., but even we were surprised by this headline. We will continue to weave this theme throughout client portfolios in the coming years.

Anyone Tired of the Fiscal Cliff yet? The President and Republicans have begun jockeying on the fiscal cliff and long-term fiscal reform. Having won the election, the President is pushing for higher tax revenues of $1.6 trillion over the next ten years. This is double the $800 billion that was almost agreed to last year during the debt ceiling debate. The President appears to be going “all in” on his populist platform, but the Republican House will be the key check on his ambitions. We hope that the initial salvo from the Oval Office is only a negotiating technique, and both sides can come to a reasonable agreement. The S&P 500 finished the week down 1.36 percent and the 10 year treasury yield drifted lower.

Our takeaways from the week

• Political and economic reforms occurring in India and China should make the countries more attractive to investors

• Market volatility will likely continue as long as lawmakers debate solutions to the fiscal cliff

Disclosures