Spreading the Wealth: Article on Ferguson Wellman in Oregon Business Magazine

Oregon Business Magazine Spreading the Wealth 

February 25, 2014

By Paige Parker

A high bar to clear. Until last year, investors seeking the expertise of Portland firm Ferguson Wellman Capital Management needed to bring at least $2 million along with them. The 39-year-old wealth management firm lavishes personal attention on its clients. Some families have trusted Ferguson Wellman with their money through three generations. And its employees are far from fickle: Not a single investment professional hired in the last 25 years has left Ferguson Wellman for another job, says CEO James Rudd. The firm closed out 2012 with just shy of 600 individual and institutional clients and $2.91 billion in assets under management. “We’re not a hot-dot manager,” Rudd says.

Creating growth, controlling growth. Market research told the employee-owned firm that the time had come to pursue less wealthy investors. Assuming it would attract younger investors, Ferguson Wellman this summer added two employees and launched West Bearing Investments, a division for Oregon, Washington and California clients with at least $750,000 to invest. West Bearing clients have access to the same investments as Ferguson Wellman clients, as well as direct access to the analysts who create those investments.

The rich get richer. On January 1, the firm raised its minimum for entry into the established Ferguson Wellman division to $3 million. The move doesn’t affect current clients. “I’ve been here 31 years, and this is the fourth time we’ve increased our minimum,” Rudd says. Ferguson Wellman first established a minimum, then $1 million, in 1989. The higher minimum “allows us to continue to be very client centered in what we do and very entrepreneurial,” Rudd says. “Clients are the greatest resource that we have. Believe me, it takes years to form a trusting relationship with a client.”

Surprising results. The 43-employee company ended 2013 with $3.8 billion in assets under management, largely because of the strong performance of the stock market. But it also brought in 52 new clients. Twenty-eight came from the West Bearing division, which hit its goal of $25 million in assets under management.

So has the double-digit growth in Oregon’s software sector brought young, flush investors into the Ferguson Wellman fold? Not yet. The new clients aren’t of the high-tech hoodie set, but rather business owners, entrepreneurs, doctors and those who’ve inherited money. “When it came down to it, in the Northwest — anywhere, for that matter — $750,000 is a great amount of money to be putting into a retirement,” says Mary Faulkner, senior vice president for branding and communications. “Our demographics at West Bearing compared to Ferguson Wellman, they’re essentially the same. It was an exciting discovery for us — how wealth manifests itself in the Northwest.”

"Putin" Russia Behind Us

by Shawn Narancich, CFA Executive Vice President of Research

Good Friday, Great Week

Shaking off another bout of Russian adventurism in the former Soviet Union, stocks moved further into record territory this week on the heels of a better than expected jobs report domestically and encouraging manufacturing reports both here and abroad. Investors have witnessed a slow but steady reversal of the early 2014 risk-off trade, with benchmark U.S. Treasuries retracing approximately half of their earlier year gains and the S&P 500 now up 7 percent from its early February lows. Despite cold and snowy weather that has put a damper on retail sales this winter, we continue to foresee a stronger U.S. economy this year, supported by a rejuvenated energy sector that is in turn producing a renaissance in U.S. manufacturing.

Decoupling

A monthly jobs report signaling net non-farm payroll gains of 175,000 is not ordinarily a reason to celebrate, but viewed against the cold and snowy weather of one of the nation’s worst ever winters, the fact that February employment gains approached the average levels achieved last year is notable. We are encouraged to observe that local and state employment, after being such a material drag for so long, posted gains during the month, but even more important is the continued employment gains reported in construction and manufacturing. Dovetailing with the detail of today’s jobs number was the purchasing managers report for February out earlier this week, which showed manufacturing expanding at a faster pace domestically. Given the encouraging economic data, we foresee the Federal Reserve continuing to pare its purchase of Treasuries and mortgage backed securities, as likely to be detailed at its next FOMC meeting March 19^th.

This week, investors witnessed Russia’s ruble tumble in response to the country’s Crimea incursion, forcing the central bank to boost short-term interest rates in support of the currency, but also adding to the risk that Russia falls into recession.  With emerging market currencies under pressure and in turn creating inflationary problems beyond US and European shores, we see developed economies that have increasingly decoupled from their emerging market counterparts. Supporting our outlook for the world’s developed economies to outperform in 2014, Europe reported its best retail sales numbers in thirteen years and coupled that with surprisingly strong manufacturing growth.

Tales of the Cash Register

Over the past couple weeks, U.S. retailers book-ended a fourth quarter earnings season that once again produced a clear plurality of better than expected results. For the retailers, hits and misses were as numerous as in any quarter we can recall. On the plus side of the ledger, investors were pleasantly surprised by strong sales at department store operator Macy’s and by the home improvement retailers Lowe’s and Home Depot, which both reported strong finishes to fiscal years advantaged by the rebound in housing. Meanwhile, investors in Radio Shack and Staples were left to lick their wounds, as both these companies continue to suffer from sales lost to the digital economy in general and Amazon.com in particular. Both undershot investor expectations and are in the process of closing hundreds of stores to right-size their disadvantaged business models.

Our Takeaways from the Week

• Stocks forged new highs despite geopolitical tensions in Eastern Europe

• Despite bad weather, the U.S. economy continues to make encouraging progress

Disclosures

Cole Quoted in the Portland Business Journal Regarding Angel Investors

The Portland Business Journal Q&A: Ralph Cole on How New Angels Can Get Their Wings

February 28, 2014

by Malia Spencer

Startups can be risky investments, so for those considering investing in the space there are some critical elements to think about.

What is your risk tolerance? Since the money can be tied up for years, are you comfortable with illiquid investments? And perhaps most importantly, if you can’t afford to lose it all, you probably shouldn’t do it.

Ralph Cole, executive vice president, equity strategy and portfolio management for Ferguson Wellman Capital Management offers some of his insights on how his firm handles questions about this asset class.

How often do clients inquire about this type of investing?

A lot of our clients, if they made their money through their own business, which a lot of our clients did, and if they are involved in the startup community in Portland, they may take the lead themselves. It’s the guy that has never done it, but people know he has money, that comes to us and asks, “What do you think?” It’s not as often as you might think, several times a year at least.

What should people think about if they are exploring this option?

It’s really understanding your motivation for doing it. Are you doing it to help the community here in Oregon or are you doing it to help someone you know or is it just something that interests you. That will make a difference how you view it as an investment.

What kinds of questions should they ask their financial adviser?

Actually, we end up asking the questions and then help them understand the perimeters of the investment. Do you want your exposure to be limited? What slice of the portfolio do you want tied to it and how much more commitment do you have to make if these go south? How involved do you want to be — a lot of angel investment funds want you to be involved.

How much of a portfolio do people look at for this type of investment?

There is no rule of thumb, but it’s what we consider venture capital. The venture slice for us is 2 percent or 3 percent of a portfolio, not much more than that. The more you have the more you can afford to put into it because it is so high risk. It comes down to how much are you willing to lose. This can be the highest returns in the portfolio but it is the most volatile.

With headlines like Facebook’s $19 billion acquisition of WhatsApp and other high profile tech startup stories, is that fueling interest?

This happens at every part of the cycle, you start early out of a recession and people are nervous and wary, but they start to see other investments doing well and start to feel better about the economy and are now willing to look at what else is out there. They see headlines that tech is booming and people want to know how to get in it. But those investments (in high profile deals) were made years ago. The time to think about it is at the bottom (of the cycle).

Angel investing: risks, rewards

52%: Amount of angel investment exits that returned less than the capital invested.

7%: Amount of exits that produced returns 10 times the amount invested.

Puerto Rico Debt Crisis

by Brad Houle, CFA Executive Vice President

As of late, Puerto Rico has been in the news due to financial problems that stem from too much debt, a shrinking population and weak economic growth. Consequently, Puerto Rico's debt has now been downgraded to below investment-grade status. Puerto Rico is a territory of the United States and as a result is able to issue municipal debt that is federal and state tax-free to investors in every state. Puerto Rico has roughly $70 billion in outstanding debt that is widely owned by municipal bond investors in high-tax states with limited municipal bond supply due to Puerto Rico’s favorable tax treatment and ample supply.

The government of Puerto Rico has been taking steps to stabilize their economy. Governor Alejandro Garcia Padilla has enacted drastic pension reform and economic growth has improved recently. However, Puerto Rico needs to access the bond market next month with a planned $3 billion dollar bond sale. In order to attract investors, Puerto Rico will have to pay a high single-digit rate of interest in order to compensate investors for the default risk. We believe that Puerto Rico will be able to successfully issue this debt which should shore up the finances as well as lessen the news flow. Additional liquidity coupled with less financial media attention should allow for a rebound in the prices of the debt.

While the situation in Puerto Rico appears to have stabilized, the territory is not yet out of the woods. There are still high levels of unemployment and violent crime and a business climate that is considered to be unfriendly. If the financial situation gets worse, there is some question whether the U.S. Government would step in to provide assistance. This is a complicated situation in that Puerto Rico is a territory and not a state. Detroit was allowed to go bankrupt and received no state or Federal assistance. In addition, there is not a clear mechanism for an orderly bankruptcy due to the territory status.

If the situation in Puerto Rico becomes more serious, some are concerned that it would become a systemic crisis across the municipal bond market. In past municipal bond market corrections, we have used the dislocation to buy bonds at attractive valuations for our clients. Overall, municipal bonds have been a very safe investment, specifically according to Moody's for the last 40+ years, only .012 percent of municipal bonds have defaulted. Said differently, Strategas Research has calculated that of the greater than 1 million municipal bond issues outstanding only 71 have defaulted between the years of 1970 and 2011.

Our takeaways for the week:

• We have not actively purchased Puerto Rico debt for our clients in the past and are not buyers at this time. We view Puerto Rico debt as a “hold” for investors that do own the debt. Presently, the situation is characterized by more smoke than fire. Following a successful bond offering and as news flow abates, there will probably better opportunities to exit positions in Puerto Rico debt if individual risk preferences warrant doing so.
• This week we saw the S&P 500 hit new all-time highs.

Disclosures

Money Talks

by Jason Norris, CFA Executive Vice President of Research

Money Talks

Earlier this week, Facebook anted up close to $20 billion (with a capital B) to purchase WhatsApp, a mobile texting company. The company is estimated to gross $300 million in revenues this year and $500 million in 2015 by charging $0.99 per year to allow users to by-pass texting fees from their wireless provider. One can argue if the price will be “worth it” for Facebook, but we do know that WhatsApp’s 50 employees are pleased.

This deal is just one of the several major merger and acquisition (M&A) deals we have seen this year. On top of the Facebook deal, over the last week we saw a major take-out for Forest Labs, talk of Safeway going private, and Comcast bidding for Time Warner Cable. Corporate America is flush with cash and, as we forecasted, is putting it to work. Industry analysts have yet to declare that we are off to the races for M&A, but confidence is improving.

Modern Day Cowboy

Move over Henry Ford, here comes Elon Musk, the CEO and Chief Product Architect for Tesla Motors. The high-end electric car maker continues to push the limits on manufacturing and innovation.  While global demand is picking up and Tesla has been ramping up production to meet these needs, profitability and valuation are key determinants of a good stock, on top of a good company. One can get caught up in the hype of the revolutionary envelope Tesla pushes on a manufacturing basis (check out this video for a demonstration). Is a good company necessarily a good stock?  When you look at the value investors are giving Tesla, it is $817k per vehicle sold. The auto average is $13k. One could argue that Tesla should command a premium, but the current premium may be a little too rich for our taste.

Baby, It’s Cold Outside

The recent polar vortex that has affected most of the U.S. the last few weeks has impacted several economic indicators (as highlighted last week by Ralph Cole) as well as commodity prices, specifically natural gas. Natural gas prices in mid-January hovered around $4.00/btu. Since then, gas has spiked to over $6.00/btu. While this may have a short-term impact on the cost of energy, we do not foresee much more upside pressure to gas prices. At these levels, we are likely to see some shift in exploration and production from oil to gas since the cash flows at these prices can be very attractive. Therefore, as demand slows with warmer weather and more supply comes online, we would expect gas prices to trend lower.

This phenomenon in the U.S. has led to an energy/manufacturing renaissance. Low energy prices have allowed manufacturers to “on shore” their production because the costs have become more attractive. Especially those industries where natural gas is a major feedstock:  chemicals, fertilizer, etc. There are plans for 10 new ethane facilities (or crackers) in the U.S. due to the increased supply of energy and natural gas. This will result in a major increase in polyethylene supply, which is a major input for plastic, thus, lowering the cost for thousands of consumer and commercial products, while increasing jobs in the U.S.

Takeaways for the Week

• M&A deals are starting to pick up and companies are paying premiums for growth
• Low commodity prices and technological innovation is a boom for the U.S. economy, thus benefitting the U.S. consumer

 Disclosures

Sympathy for the Weatherman

by Ralph Cole, CFA Executive Vice President of Research

Sweater Weather

As economic and market forecasters, we have a great deal in common with meteorologists. We know forecasting daily moves in the stock market is a fools game, but that over longer  time horizons, our forecasting accuracy improves greatly. Weathermen face the difficult task during snow storms of forecasting snowfalls and temperatures minute-to-minute, and hour-to-hour – to which we say... “No thanks!”

The East Coast has been battered by several snow storms over the past month, and this has had a negative impact on high frequency economic data. The reason that this has such a large effect on government data is because the Northeast megalopolis that spans from Washington D.C. to Boston is responsible for 20 percent of the nation's GDP. Largely due to poor weather conditions, retail sales in the month of January were down .4 percent. Similarly, industrial production also came in weak for the month of January, down 1.4 percent.

We believe the current slight weakness in economic data is a blip on the Doppler radar, and economic growth should accelerate as, literally, the snow thaws.

Welcome to the Jungle

One of Janet Yellen’s first duties as Federal Reserve Chairwoman was the semi-annual report to Congress. Timing of the report was helpful to both Congress and the markets because both senate and house leaders are trying to determine and understand the likely pace of tapering to expect in 2014. More specifically, what indicators will the Fed be relying upon, and are there any hard and fast rules governing the pace of tapering? As any good Fed Chairwoman would do, Janet left answers to all of those questions up in the air. Yes, she would like to continue tapering at this pace, but she is not tied to a $10 billion monthly reduction. Yes the Fed will be monitoring the unemployment rate, but it is not the only indicator they will be considering.

Despite the lack of specifics in her answers, the Fed Chairwoman’s performance was received very positively by the markets and as of this posting the S&P 500 was up 2.4 percent for the week.

Takeaways for the Week

• Despite several weak near-term economic statistics, the economy continues to expand at a reasonable pace
• The new Fed Chairwoman assured Congress and the markets that she will be a steady hand at the helm of the Fed

Disclosures

Synchronized Global Expansion?... Far From It

by Shawn Narancich, CFA Executive Vice President of Research

Dawn of a New Era

Amid heightened turbulence in the global economy and capital markets, Janet Yellen was sworn into service as the Federal Reserve’s first chairwoman this week. Although she has a dovish reputation as an economist focused on the labor market implications of monetary policy, she ascends to a position requiring the optimization of full employment and low inflation. In this spirit, and acknowledging the faster pace of U.S. economic expansion at present, we do not expect this morning’s surprisingly weak payroll report to throw the Yellen Fed off its course of continuing to taper QE3. The headline number of 113,000 net new jobs created in January is anemic but, like December’s similarly weak number, unusually severe winter weather could be at play. More importantly, the underlying detail is encouraging – more private sector hiring and less competition from the government, which continues to shed jobs. After retreating nearly 6 percent year to date, blue chip U.S. equities shook off the weak payroll headlines and rallied back into positive territory for the week.

Decoupling

While retailers cut back following a choppy Christmas selling season, construction and factory jobs surged in January, providing more anecdotal evidence of a renaissance in U.S. manufacturing. Combine that with the surge in U.S. energy production and low inflation, and what we see is a relatively healthy domestic economy that appears able to withstand an increasingly uneven outlook internationally. The global purchasing manager surveys out this week demonstrate that economic activity globally is far from the synchronized global expansion that some would claim. Consider China, where the manufacturing sector is teetering on the edge of contraction, and contrast it with Europe, where despite 12 percent unemployment, factory output is growing at a faster clip. While China is still growing, its rate of expansion has slowed, taking the punch out of commodity prices and serving to help developed nations worldwide, whose lower bills for gasoline and agricultural commodities are helping boost consumers’ disposable personal income.

Emerging Market Contagion?

With the sun beginning to set on another reasonably constructive earnings season, we observe corporate earnings for the fourth quarter of 2013 that in the aggregate appear to have risen by about 8 percent. But with emerging equities already down as much as 11 percent year to date, investors are concerned that the relatively modest pullback U.S. stocks have already experienced could turn into something more sinister. So far, the interest rate hikes in nations like India, South Africa, and Turkey that are being used to help stem currency weakness and capital outflows appear localized to such economies disadvantaged by current account deficits that are driving up inflation. In contrast to the late 1990’s when currency devaluations in countries like Thailand were exacerbated by foreign currency debt obligations (making those obligations more expensive to repay), emerging market challenges today center around the more common but less pernicious problem of stagflation, a combination of slowing economic growth and rising inflation. As emerging market countries adjust to higher interest rates, we expect their growth to slow and in turn, dampen the level of global economic growth. But just as it did against a strong domestic backdrop amid the Asian Financial Crisis, we expect the U.S. economy and capital markets will weather the storm. Acknowledging the near-term challenges presented by emerging markets, we recently reduced our allocation to this equity style.

Our Takeaways from the Week

• Janet Yellen became the Fed’s first Chairwoman, amid an increasingly turbulent global economy
• Stocks bounced back, defying disappointing headlines on the jobs front and mixed manufacturing data

Disclosures

Are You Ready For Some Football?

by Jason Norris, CFA Executive Vice President of Research

Super Bowl Shuffle

With Super Bowl XLVIII due to kick off this Sunday, the results have historically had an impact on investors’ portfolio for that calendar year. This match up, for me, is a classic. Growing up in Boise, Idaho, most likely you were either a Seahawks fan or a Denver Broncos fan. From the late 1970s through the 1990s, both teams played in the AFC West and were archrivals. My allegiance always went to the Seahawks with great players like Steve Largent, Kurt Warner, Dave Krieg and David Hughes. And with Super Bowl XLVIII, my allegiance has not altered, and this would be beneficial for equity markets. Even though correlation does not lead to causation, historically, if a team from the NFC wins the big game, the S&P 500 is positive 80 percent of the time. Now that the Seahawks have made the move to the NFC, a win “may” portend a positive gain for equities.

While we are not big fans of seasonal and/or cyclical indicators, we do pay attention to them. With the S&P 500 down more than 3 percent for the month of January, history does not look good for the remainder of 2014. The returns in January usually predict what the returns will be for the entire year. Since 1950, this “January Barometer” has a completion percentage of 80 percent. While not perfect, it is an interesting factoid. Therefore, we should be cheering for the Seahawks to offset this calendar trend…

One final note on the subject: the Seattle Seahawks have been a great investment for owner and former Microsoft co-founder, Paul Allen. He bought the team in 1997 out of “civic duty,” and since then it has increased in value six-fold, while his Microsoft stake has merely doubled.

Down in a Hole

Global markets continue to be disheartened with events in emerging markets. Currency devaluations and higher interest rates are resulting in a “risk-off” trade for global investors. This sell-off has not been limited to just emerging markets. As we have seen here in the U.S., global developed markets felt the effects as well. The global markets (as measured by the MSCI All-World Index) are down five percent for the month of January. These risk-off trades have resulted in developed market interest rates declining meaningfully. The 10-year U.S. Treasury yield started 2014 at 3.00 percent; it is now trading at 2.65 percent. Yields in Germany and the UK have dropped by similar levels.

Due to this uncertainty, we are looking to reduce our emerging market exposure and allocate those funds into the UK, focusing on the consumer.

It’s Alright

While the January sell off is disappointing, we are still constructive on equities, especially developed market equities. This week we saw strong economic data in the U.S. regarding GDP and consumer spending even though consumer sentiment continues languish. Earnings for U.S. companies have been relatively healthy with 72 percent of companies having reported beating expectations. While we have seen some uncertainty in some parts of the earnings reports, specifically enterprise technology, we are still like the overall market. Specifically we increased our exposure to U.S. healthcare this week as we see the sector as offering great defensive/growth opportunities.

Takeaways for the Week

• Even though we believe interest rates are going to trend higher, holding bonds in portfolio is still warranted
• Developed market economies continue to improve, and while we are experiencing some volatility, we are still positive on U.S. equities

 Disclosures

Why the Price of Tea in China Matters

by Brad Houle, CFA Executive Vice President

One of the risk factors we highlight in our 2014 Capital Market Outlook is China's growth, which is slowing more than expected.  This week China's Purchasing Managers Index (PMI) was released.  A Purchasing Managers Index is an indicator of economic health.  PMI data is collected from various industries all over the world. PMI data is collected by analyzing five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.¹ The point of PMI is to indicate if an economy is accelerating or decelerating.  A number above 50 suggests improvement and a number below 50 suggests deceleration.  The latest PMI for China was 49.6 down .9 from the three month average of 50.3.  This is the fourth month in a row the Chinese PMI has declined.

Even with a decelerating economy China is expected to have Gross Domestic Product (GDP) growth between 6-7 percent.  China has been able to engineer a soft landing, managing GDP growth from 11 percent to the 6-7 percent level.  A soft landing is an expression for a decelerating economy that slows down without going into recession.  However, Chinese economic data is looked upon with some skepticism by market participants. Chinese GDP is reported in a way that is not consistent with how GDP data is reported in all the world's developed economies.  There is very little transparency in the numbers not to mention an unusual stability that might suggest certain components of the data are not completely factual.  In China there is a large underground cash economy that would be difficult to measure.

The China PMI news put a downdraft in the U.S. markets and caused some minor selling in other developed markets.  Other emerging markets also had a difficult week.  Argentina's peso declined the most in 12 years due to the cumulative effect of years of the Kirchner government’s economic mismanagement. Argentina has been challenged with uncontrolled inflation and a currency black market that has undermined the government’s efforts to regulate capital flows.  In addition, Turkey has been struggling with a political crisis that has undermined confidence and led to a large drop in the Turkish lira.

Earnings season is underway and according to FactSet Research, of the 53 companies of the S&P 500 that have reported fourth quarter 2013 earnings, 57 percent have reported earnings above the mean estimate.  The blended growth rate has been 5.9 percent with financials having the best growth rate and the energy sector having the lowest growth rate.

Our Takeaways for the Week:

• The strength of the Chinese economy is top of mind for investors and will continue to be impactful to developed and emerging markets

¹Source: Investopedia

Disclosures

Investment Outlook Video: First Quarter 2014

We are pleased to present our Investment Outlook: First Quarter 2014 video titled, “Removing the Training Wheels.” This quarter, Chief Investment Officer George Hosfield, CFA, discusses how the Fed will approach tapering of quantitative easing and what we believe will occur in the economy, particularly in regards to the unemployment rate, interest rates and stock market return expectations.

To view our Investment Outlook, please click here or on the image below.

jpeg of Q1 2014 Outlook video for email hyperlink

Oregon Business Magazine Names Ferguson Wellman a Top Financial Manager/Planner in its 2014 Power Book

PORTLAND, Ore. – January 15, 2014 – Ferguson Wellman Capital Management is pleased to announce that the firm has been named by Oregon Business Magazine as a top financial planner/manager in their annual Power Book publication. Oregon Business Magazine ranked Ferguson Wellman second in the state on their list of 27 financial service companies. The listing was created by calculating the total number of assets under management, in Oregon and in total.

“We are very flattered by this honor, but feel most satisfied that we have our clients’ confidence and trust. That is truly paramount to us,” said Jim Rudd, chief executive officer.

Founded in 1975, Ferguson Wellman Capital Management is a privately owned investment advisory firm, established in the Pacific Northwest. With more than 651 clients, the firm manages $3.8 billion in assets that comprise union and corporate retirement plans; endowments and foundations; and individuals. In 2013, Ferguson Wellman created a new division, called West Bearing Investments, that servers emerging and established wealth. Minimum account sizes: $3 million for Ferguson Wellman; $750,000 for West Bearing Investments. (as of 12/31/13)

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Off to the Races

by Shawn Narancich, CFA
Executive Vice President of Research

 Ohhh, the Weather Outside Is Frightful

Rubber hit the road this week for investors as traders and money managers returned to work after what for many turned out to be a nice two week break. Stocks appear to be consolidating gains realized over Christmas and New Year’s, with a plurality of economic data pointing to faster U.S. growth in 2014. A fly in the ointment was this morning’s December employment report which showed the economy producing just 74,000 jobs - albeit in a month where bad weather seems to have had a disproportionately negative impact on the headline number. Nevertheless, if one excludes construction job losses and cases where people were counted as unemployed because they couldn’t get to work, the job numbers still fell short of estimates. And while the unemployment rate dropped to 6.7 percent, it fell primarily because more of the jobless gave up hunting for work. Indeed, as we look back to year-end, the labor force participation rate has fallen to a new cyclical low of 62.8 percent - that is the percentage of “employable” people either with a job or looking for work.

Gaining Momentum

Will one month of relatively poor employment data dissuade the Fed from its planned tapering of QE? We doubt it. Q4 retail sales picked up, the renaissance of U.S. manufacturing and energy is going full steam ahead, and capital spending by companies flush with cash appears on the verge of inflecting upward. In related fashion, this week’s monthly trade data was bullish. The November report showed U.S. imports exceeding exports by a four-year low of $34 billion. Increasingly positive trade flows are being driven by two key trends: rapidly falling oil imports resulting from new domestic production and surging exports of gasoline and diesel being refined from the crude. As a result of these encouraging trends, GDP growth estimates for the fourth quarter are being revised upward, and for the first time in recent memory, the U.S. economy may have grown in excess of 3 percent for two consecutive quarters. With fiscal headwinds waning, 2014 is shaping up to be a year of faster economic growth domestically.

The Dawn of Another Earnings Season

Alcoa unofficially kicked off the fourth quarter reporting season by reporting weaker than expected profits that left investors disappointed and shareholders with lighter pockets. Other early reports from seed and herbicide producer Monsanto, US beverage producer Constellation Brands and chipmaker Micron were more encouraging, and each of these cases resulted in nice stock price gains afterward. Overall, investors are expecting blue chip earnings growth of 6 percent for Q4, on flat revenues. These estimates could prove conservative if fourth quarter GDP growth was as strong as the 3 percent rate we expect. Next week, several big banks including JP Morgan and Citigroup will come to the earnings confessional, as well as industrial conglomerate General Electric. Let the fun begin!

Our Takeaways from the Week

• Stocks are taking a breather, consolidating some of their heady 2013 gains
• Despite a hiccup in the monthly employment report, the U.S. economy appears to be gaining steam

Disclosures

Ferguson Wellman Capital Management Ranked as a Top Western Adviser

Ferguson Wellman Capital Management Ranked as Top Western Adviser

PORTLAND, Ore. – December 23, 2013 – Ferguson Wellman Capital Management has recently been named by InvestmentNews as a top adviser company in the Western United States.

InvestmentNews ranked Ferguson Wellman 10th on their list of 15 registered investment advisors in the west. Ferguson Wellman is the only firm from Oregon to be named and the largest in the Pacific Northwest on their list. The ranking was calculated by total assets under management, with Ferguson Wellman at $3.2 billion in assets under management at the time of their survey, which was November of 2013.

“While it is always gratifying to be ranked highly among your peers – what is most meaningful to us is earning the trust and confidence of our clients. We work hard at doing that every day,” said Jim Rudd, chief executive officer.

Founded in 1975, Ferguson Wellman Capital Management is a privately owned investment advisory firm, established in the Pacific Northwest. With more than 600 clients, the firm manages $3.8 billion in assets that comprise union and corporate retirement plans; endowments and foundations; and individuals. Minimum account size: $3 million. (as of 12/31/13)

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Methodology InvestmentNews qualified firms headquartered in the United States based on ADV data reported to the Securities and Exchange Commission as of Nov. 1. To qualify, firms must have met the following criteria: (1) latest ADV filing data is either on or after Jan. 1, (2) total AUM is at least $100M, and (3) does not have employees who are registered representatives of a broker-dealer, (4) provided investment advisory services to clients during its most recently completed fiscal year, (5) no more than 50% of regulatory AUM is attributable to pooled investment vehicles (other than investment companies), (6) no more than 25% of regulatory AUM is attributable to pension and profit-sharing plans (but not the plan participants), (7) no more than 25% of regulatory AUM is attributable to corporations or other businesses, (8) does not receive commissions, (9) provides financial planning services, (10) is not actively engaged in business as a broker-dealer (registered or unregistered), or as a registered representative of a broker-dealer, (11) has neither a related person who is a broker-dealer/municipal securities dealer/government securities broker or dealer (registered or unregistered), nor one who is an insurance company or agency, (12) the state in which financial advisory business is conducted is one of the following: AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, or WY.

Source: InvestmentNews Data

Reeling in the New Year

by Jason Norris, CFA Senior Vice President of Research

With 2013 coming to a close, one of the most frequent questions we have received is, “What’s the encore?”  The S&P 500 rose over 32 percent, the best return since 1997. Will 2014 result in profit taking or will there be continued follow through as investors deploy their cash?

A year ago, investors were looking at a lot of uncertainty with the pending government sequestration, increasing taxes (as you recall, the payroll tax was increased to 6.2 percent), as well as international questions with Europe and a possible slowdown in China. Those fears, at least by market perception, were put to bed as the Federal Reserve continued to hold interest rates down with their bond buying program. As the U.S. economy showed steady gains and the Fed signaled the end to quantitative easing, investors chased stocks higher and exited bond positions. In the last six months of 2013, over $175 billion left bond mutual funds but only $75 billion found its way into equity funds. We believe there is still a lot of cash to be deployed in 2014.

Against the Wind

2014 will be the advent of the Janet Yellen tenure at the Fed, a mid-term election, as well as the conclusion of QE3. We continue see slow improvement in economic data for the U.S. economy. Unemployment claims are trending lower (after a volatile month due to the holidays). Manufacturing data remains healthy, as reflected by this week’s PMI reading of 57 (a score of 50 or above signals strength). The U.S. consumer remained engaged into the end of the year as retail sales rose over four percent (primarily driven by double digit on line sales growth). Finally, the housing market is improving with prices rising and inventories falling.

What could derail the expansion? Rising rates. As the Fed unwinds its bond buying, we believe rates will continue to trend higher. Will these higher rates be a meaningful headwind to growth and equity returns? We don’t believe so. However, we will be monitoring closely.

Back for More

This brings us back to the first question: what does 2014 have in store after such a strong 2013? Looking at historic returns, equities revert to their averages. Since 1928, there have been 17 periods when stocks returned over 30 percent. The following year, equities averaged an 11 percent return and were positive two-thirds of the time (in line with historic annual returns). Therefore, this year, equity returns are going to be contingent on corporate profit growth and market valuation, which we believe are both constructive.

We hope you all have a healthy and prosperous 2014 and we look forward to seeing our clients and friends at one of our many Investment Outlook presentations over the next six weeks.

Our Takeaways for the Week:

• The retail investor remains skeptical of equities
• The U.S. economy continues to show steady improvement

 Disclosures

Deidra Krys-Rusoff Quoted in Bloomberg Business News

Bloomberg Business Week Detroit Pension Proposal Would Shut Out New Hires

September 27, 2013

By Corey Williams

Hoping to stanch some of the red ink flowing from Detroit, its emergency manager is riling the workforce with a proposal to close the city's pension plans to new employees by the end of the year and move the city to a 401(k)-style system that has become the norm in the private sector.

Detroit's underfunded obligations of about $3.5 billion for pensions and $5.7 billion for retiree health coverage are part of the city's $18 billion debt load and a major reason emergency manager Kevyn Orr filed for bankruptcy protection in July.

Now, he wants to end pensions for new employees and freeze benefits to about 18,000 members. Non-taxable annuity savings will be closed to new employees and no future contributions would be accepted after Orr's proposed Dec. 31 "freeze date."

Non-vested active system members also will be frozen out by Dec. 31.

"They took my wages and now they're trying to take my pension," said Mike Mulholland, vice president of American Federation of State, City and Municipal Employees. "All of our people are saying 'what are they doing to us?'

"We've already given concession after concession, and now to be asked to give up more and be put in a defined contribution plan ... they want to force us to take something where we have no security when we retire."

Orr's pension plan has to be approved by Michigan Treasurer Andy Dillon and is one of the strongest challenges to unions in the one-time organized labor stronghold.

It also is likely to continue the parade of court challenges by union leaders who say changes to pensions and bargained health care benefits violate Michigan's Constitution.

But Orr counters that federal bankruptcy law trumps state law.

James McTevia, a Detroit-area turnaround expert, said he is not aware of a previous ruling on the matter, but adds it's clear what Orr is trying to do.

"He is following the natural process for a reorganization," said McTevia, of McTevia and Associates. "That sets up a mechanism to make changes to the entity's debt structure. If the city doesn't have the money to pay (into the pensions), what difference does the law make? If the city can't do it, it can't do it. That contract has to be rejected and another contract has to be entered into."

A draft of the pension proposal was given last week to the General Retirement System, which represents about 20,500 active and retired city workers. AFSCME Council 25 spokesman Ed McNeil said unions have not received the draft.

In it, the city also would contribute five percent of the base pay of non-uniformed workers to the 401-type pension plan.

Overtime, bonuses and longevity pay will not be factored into compensation as they have been in the past. The city will make no contributions to a deferred compensation plan in which participant contributions and earnings on retirement money are tax-deferred.

A separate plan for police and fire retirees still is being worked on and has not been presented to that pension system, said Bill Nowling, a spokesman for Orr.

"But it will be similar" to the General Retirement System plan, Nowling said.

The police and fire system has nearly 12,700 members.

The pension systems, city unions and individual retirees are fighting Orr in bankruptcy court. They don't believe he has proved Detroit is insolvent and complain that he hasn't bargained in good faith.

Mary Estell, a retired Department of Public Works employee, receives a pension of about $2,300 per month after 32 years with the city. She realizes the likelihood of getting more is unlikely.

"At this point, there is nothing we can do," Estell said of Orr's pension plan. "The city doesn't have any money, so we won't get any increase. If the bankruptcy doesn't go through, then maybe there's a chance we will get an increase in the future."

Orr's plan does not say how much would be saved, according to a draft of the proposal.

A spokeswoman for the pension system says officials still are studying the plan. "It really just caught us completely off guard," said Tina Bassett. "It was the first time we saw it."

But any changes could take as long as two decades to make a dent in how Detroit's long-term debt is structured, according to Michael Sweet, a bankruptcy attorney with Fox-Rothschild.

Moving from a defined benefit to a defined contribution plan "isn't going to change the savings tomorrow," Sweet said.

"Kevyn Orr is working on all sorts of different things. One is to address the short term issues and deal with the longer term imbalance of the budget."

Private companies long ago starting shedding plans that relied heavily on employer contributions in favor of those where workers decide how much of their pay they want socked away. As cities and states continue to buckle under the pension and health care liabilities, elected leaders are pushing for similar changes.

"Something has to be done because the pensions are extremely expensive and with the aging demographic, those costs just keep going up," said Deidra Krys-Rusoff, a portfolio manager with Ferguson Wellman, an Oregon-based capital management firm.

Christmas Comes Early … and Late

by Ralph Cole, CFA Executive Vice President of Research

Melt with You

It feels like the market is melting up these days as stocks continued their year-long rise during the shortened holiday week. Investors continue to be heartened by positive economic data signaling stronger growth as we enter 2014. Durable goods orders were up 3.5 percent in November with automobiles, airplanes and refrigerators helping drive end demand. Also, new home sales remain robust with record-setting sale prices. Both of these data points hit on some important topics for our 2014 Investment Outlook.  Specifically, we think demand for capital equipment will finally accelerate in 2014 due to underinvestment and substantial cash balances on corporate and consumer balance sheets. Furthermore, consumers are increasing their spending as a result of the “wealth effect” that has been fueled by increased home and stock prices.

Crosstown Traffic

Our investment team has been writing for some time about the shift to online shopping and this trend came to a head this week for Amazon and UPS.  For those of us who like to start shopping closer to Christmas, Amazon Prime^© seems like the perfect solution.  For an annual fee of $79.00, Amazon provides two-day free shipping on most merchandise. We don’t think anyone is surprised to learn that we live in an era of procrastinating techno-geeks who wait until the last minute to ship gifts. This time, the sheer volume of orders overwhelmed both Amazon and UPS. Though UPS has not stated how many packages were affected, the number seems to be in the hundreds of thousands. While both Amazon and UPS are doing what they can to satisfy customers, the real story is the volume shift to cyberspace. Amazon signed up over 1 million additional Prime^© customers in the third week of Christmas alone. This is a nice development for Amazon because these shoppers tend to spend twice as much in a given year as those who don’t have Amazon Prime^©.

Our Takeaways for the Week

• Christmas week was just another reason for investors to keep bidding up stock prices
• Interest rates continue to move slowly higher on Fed taper talk

Disclosures

The Birth of the Fed

Posted by Lori Flexer, CFA Executive Vice President 

100 years ago today, the Federal Reserve was formed. NPR's Planet Money shares the fascinating beginnings of this important institution. Click here for the full story.

Note: Clicking on this link will take you to a third-party website. The information provided by this site is not endorsed or guaranteed by Ferguson Wellman. Disclosures

Early Christmas Gifts

by Shawn Narancich, CFA Executive Vice President of Research

Early Christmas Gifts

In what turned out to be a surprisingly action-packed week before Christmas, the markets finally shook off the shackles of worry concerning what would happen when the Fed began tapering its program of quantitative easing (QE). Bernanke proved that he’s no lame duck chairman and investors learned that stocks can still go up despite a slightly less accommodative Fed. In reducing monthly purchases of Treasury and mortgage-backed bonds by $10 billion per month, our central bank is acknowledging a slowly improving labor market and an expanding economy that is being boosted by several key drivers: a renaissance in U.S. energy production and manufacturing and, increasingly, the wealth effect of rising house and stock prices that is giving a nice lift to consumer spending. Looking ahead, we expect incoming Fed Chair Janet Yellen to continue what Bernanke started. Our view is that further reductions to QE will be commensurate with continued improvement in labor markets, subject as always to the Fed’s other key mandate—keeping inflation low.

Always a Bear Market Somewhere

In stark contrast to stock prices that are once again setting new highs, gold prices have fallen substantially. After attracting increasing amounts of attention as a hedge against monetary dislocation and unchecked growth in the money supply, gold is increasingly being abandoned by investors now more attracted to robust stock market returns and, for those with a lower risk tolerance, bonds that are now offering real rates of return. From its high in August 2011, gold is now down 36 percent. It may be pretty to look at, but with the Fed now in the early stages of unwinding QE, it has lost its shine.

Blue Burner

Sticking to the commodity theme, one key source of energy whose price is going the opposite direction is natural gas. Much maligned by investors because of its seeming ubiquity, the front-month contract is up 31 percent since August. Cold weather has boosted the demand for natural gas, one of the nation’s most common sources of home heating. Weather vicissitudes aside, we like the longer-term demand case for the cleaner burning fuel to take market share of electricity generation from its dirtier cousin coal. Will gas currently priced for $4.40 per-million-BTUs go to $5.50? In the short-term, probably not, because the prolific shale fields in Pennsylvania, Wyoming and Texas will induce considerably more production if prices continue to rise.

Nevertheless, key suppliers can make a lot of money with natural gas prices in the $4.00 to $5.00 range. More importantly, our economy should increasingly benefit from using low cost natural gas and natural gas liquids to generate cheaper power and manufacture plastics. In the latter case, low cost ethane, propane and butane feedstocks are displacing oil-based naptha, incenting major chemical companies like Dow and the petrochemical arm of Shell to locate plastic manufacturing facilities stateside. The beneficial result for America is new jobs, additional exports, and healthier levels of GDP growth.

In this festive season, we wish all our friends and clients a Merry Christmas and a very happy and healthy new year.

Our Takeaways from the Week

• Investors took the start of Fed tapering in stride, as stocks rallied to new highs

• A continued flow of encouraging economic data points to faster GDP growth in 2014

Disclosures