Be Careful What You Say

by Brad Houle, CFA Executive Vice President

Flash Boys

“High-frequency trading” (HFT) was a huge media topic this week due to author Michael Lewis’ appearance on last weekend’s “60 Minutes” as part of his promotion of his latest book titled Flash Boys. What captured media attention was his claim that the stock market was a "rigged game." This statement was based upon his research for Flash Boys that detailed the impact of high-frequency trading on the stock market. HFT is a very complex trading strategy that relies on computers to trade at lightning speed to make a small amount of money on a huge volume of trades. In fact, it is theorized that 30 to 50 percent of the current stock exchange volume is HFT.

High-frequency trading is an extremely complex issue that simply can't be summarized by declaring the stock market a "rigged game."  In most forms, HFT is not illegal. It falls into a grey area of trading. If certain investors have a speed advantage, is that unethical? It is hard to say and supporters of HFT maintain that it adds liquidity to the market and facilitates trading. However, the aspect of HFT that is not defensible is that it also allows these trading firms the ability to know what other investors are doing and trade ahead of them. This practice is called "front running" which is certainly unethical and illegal.

The issue is so broad and complex, it is very difficult to determine who is doing what, and how that is impactful to the stock market as a whole. This is not a new issue for regulators who have been looking at HFT for some time now. We think the good news is that the recent attention on the topic will result in appropriate market reforms which will benefit investors. Financial markets operate on the confidence of the participants, and anything that enhances transparency and confidence benefits all investors.

While Mr. Lewis is a great writer and entertaining storyteller, his comments are unnecessarily inflammatory and might be intended to sell books and maximize the value of a possible film adaptation.

Employment Numbers March On

Turning to the capital markets, today the March employment numbers were released with a 192,000 increase in nonfarm jobs and a slight uptick in the unemployment rate to 6.7 percent. The consensus among economists was for a 200,000 increase in jobs. Due to the late-December expiration of long-term unemployment benefits, there was an expectation that the employment numbers would be even stronger than anticipated.

Historically, when long-term unemployment benefits run out, there is a significant pickup in employment. The “whisper number” was for a gain of 250,000 or more jobs. Defined as the number economists secretly hope will be the outcome, the “whisper number” usually is not reached by consensus and therefore is rarely published as an estimate. The bottom-line is that markets perceived the March job creation as a mild disappointment which resulted in some weakness in the equity markets.

Takeaways for the Week

• We view the current employment data to be moving in the right direction
• We are not overly concerned with the monthly volatility of the labor statistics

Disclosures

Tech Makes the World Go Round - Oregon Business Blog

Jason Norris, CFA, executive vice president of research for Ferguson Wellman, is a guest blogger for Oregon Business. This month, Norris shares his views on technology. From a milestone anniversary for the World Wide Web to social media IPOs, Norris shares how technology has evolved and how history can repeat itself. Click here to review the complete posting.

Spring Break Movies

by Tim Carkin, CAIA, CMT Senior Vice President

Divergent

This week the market is showing some interesting divergence. The S&P 500 performance is paltry, nearly flat on the year. Technology, biotech and consumer discretionary sectors, which are more heavily weighted in the NASDAQ, started selling off heavily last week leaving the NASDAQ down more than seven percent year to date. This week small cap stocks, which had been performing admirably, sold off more than four percent and are now negative on the year. Citigroup, Morgan Stanley and other large financials also sold off heavily after the Fed’s latest stress test results. On the plus side, emerging market stocks rallied significantly this week in hopes of new Chinese stimulus.

Need for Speed

A few good economic readings came out this week. Last month’s Q4 GDP number was revised up to an annualized 2.6 percent from 2.4 percent. This came as consumer spending in February rose by the most in three years and jobless claims declined last week to the lowest level in four months. Personal consumption expenditures (PCE), a favorite economic indicator of past Fed Chairman Bernanke ticked up 0.1 percent in February. Lower jobless claims and a low inflation rate give the Fed a little cushion to work with when considering stimulus and rate increases.

Rise of an Empire?

The constant media attention of developments in the standoff between Ukraine and Russian is weighing on the market. We did get good news on that front in an announcement from the IMF of $14-18 billion in aid. In addition, our Senate approved $1 billion in loan guarantees and the EU promised more than 10 billion euros in the next few years. On the other hand, Yulia Tymoshenko, former Prime Minister of Ukraine, announced her candidacy for president. This ensures the standoff will remain in the news through the Ukrainian elections on May 25^th.

Takeaways for the Week

• Geopolitics is a major overhang to the momentum in the U.S. economy

 Disclosures

From Healthcare to Hoops

by Jason Norris, CFA Executive Vice President of Research

I Want a New Drug

We have seen a major resurgence in the healthcare space with regard to R&D and stock performance. In 2013, with the broad market up over 30 percent, the healthcare sector returned close to 45 percent and was the second best-performing sector. This year, in a flat, sideways-trending market, healthcare has been the best performing sector. We believe the sector gives investors a great mix of growth as well as stability and income. The worst of the drug patent cliff and generic substitution is behind us. We saw this transition peak in 2011 and 2012 with the likes of Lipitor, Plavix, Viagra and Singular coming “off patent.” This total was roughly $90 billion of revenue for big pharma companies. With this event sunseting, big pharma has cut costs, spun off divisions and made acquisitions to “right size” their lines of business. We anticipate the emerging pipelines from big pharma to more-than-offset the loss of revenue that will occur in 2016 and 2017. This reemergence is driven by diabetes, oncology and anti-clotting drugs.

Another space displaying strong R&D performance is biotech. In 2013, Biogen Idec launched its revolutionary multiple sclerosis drug and this year we have seen Gilead’s hepatitis C treatment (Sovaldi) come to market. The growth opportunities for this type of drug are great. For example, six months ago, Gilead was estimated to sale $2 billion of Sovaldi in 2014. Now expectations have risen around $7 to $10 billion. The R&D efforts in drug development around the world continue to break new ground.

Cover Me

The end of March will mark the conclusion of the first open-enrollment season of the Affordable Care Act (ACA). While the rollout was far from perfect, there is still quite a bit of uncertainty of its effects on the healthcare sector. We believe, relative to investing, most of the uncertainty has been diminished. The taxes that were implemented on the drug makers and medical device manufacturers have already taken effect. It is anticipated that the remaining uncertainties will affect hospital and insurance markets. As we have seen some adverse selection in the enrollment, the overall costs to the plans may see steep increases. While there is a clause in the ACA to reimburse insurance providers for their losses, we have heard “rumblings” from Congress to repeal this provision. While that is highly unlikely, it still creates uncertainty.

Finish What You Started

On Wednesday, the Federal Reserve continued to reduce their monthly bond purchases and gave all indications that they want this program to wrap up by year end. The Fed did state, however, that they will continue to remain “accommodative” while the economy muddles along. The major change was the removal to the 6.5 percent unemployment-rate threshold. We anticipated this because of the issues around labor participation can distort the rate. We do believe that the Fed funds rate will be anchored at 0.25 percent well into 2015.

Come Monday

On Monday, April 7, the NCAA will crown a men’s college basketball champion. For those lucky enough to still have a viable bracket, you are moving closer to winning $1 billion from Warren Buffet, providing you continue to have the perfect picks. The odds of this are 1-in-9 quintillion (yes that’s 19 zeros).  Let’s hope that in the last couple days, worker productivity did not fall too much as fans tried to follow all the games.

Our Takeaways for the Week

• We remain bullish on the healthcare sector and believe it will outperform the broad market
• Even though interest rates have fallen year-to-date, as the Fed unwinds its bond buyer and the economy picks up, the 10-year Treasury will end the year above 3 percent

 Disclosures

Underneath it All

by Ralph Cole, CFA Executive Vice President of Research

Workin’ for a Livin’

The U.S. jobs report has become the most watched economic indicator in the world. The jobs report comes out on the first Friday of the month and includes the unemployment rate and number of new jobs created the prior month. Both January and February reports were underwhelming due to weather, but we think employment will strengthen more than people think in the coming months.

Dan Clifton of Strategas alerted us this week to some underlying trends that will be playing out in the labor market in the coming months. Extended unemployment ran out at the end of December. The Senate voted this week to retroactively extend those benefits through May of this year, which may or may not become law. The fact is that long-term unemployment benefits ran out for a significant number of people in December. History tells us that many of these folks will go out and find jobs, bringing down the unemployment rate faster than people expect.

We have a real-life example in North Carolina. North Carolina’s emergency benefits ran out six months ago. Since that time, the state’s unemployment rate dropped 2 percent!  During that same time period, employment in North Carolina increased 1.3 percent versus the national average of just .5 percent.

The Gambler

Vladimir Putin continues his quest to win over Crimea. He has been admonished by every major country in the world, but will not give in until after Crimea’s secession referendum on Sunday. The U.S. and other major powers have stated that this is an illegal vote that is contrary to the Ukrainian constitution. How this plays out in the near term is important, but the more interesting part of the story is the long-term implications of Russia’s aggression.

We’ve written at great length about the energy revolution here in the U.S. and the benefits that will accrue over time because of it. Much of Europe’s natural gas comes from Russia, with more pipelines in the works. This partnership is being questioned in light of Russia’s latest activities, resulting in our European allies turning their attention to “the Saudi Arabia of natural gas” (i.e., the United States). While the U.S. won’t be able to assist in the near term, we think recent tensions will cause additional pipelines and liquid natural gas terminals to be approved in the coming months.

Our Takeaways from the Week

• The labor market is stronger than people believe and will lead to rising interest rates in the coming months
• Vladimir Putin has overplayed his hand. While he may win the Crimea vote on Sunday, he just offended his country’s largest customer
• Uncertainty in China and Russia led to a sell-off in the S&P 500 of 1.7 percent for the week

  Disclosures

Marc Fovinci Quoted in Bloomberg News

Treasuries Hold Losses as Ukraine Tension Eases Before Jobs Data  By Kevin Buckland and Mariko Ishikawa

The yield on benchmark 10-year Treasuries maintained the biggest gain since November amid speculation the crisis in Ukraine will ease, and before U.S. data this week forecast to show employers stepped up hiring.

Australian and Japanese government bonds retreated after Russian President Vladimir Putin said yesterday that there’s no immediate need to invade eastern Ukraine, limiting demand for havens. Treasury 10-year yields rebounded from a one-month low, surging back above their 200-day moving average after dipping below the mark this week for the first time since May.

“If the Ukraine situation de-escalates further, we should see higher rates, and that’s what we’re expecting,” said Marc Fovinci, head of fixed income in Portland, Oregon, at Ferguson Wellman Capital Management Inc., which has $3.5 billion in assets. “There’s still a risk-aversion premium in Treasuries.”

The U.S. 10-year yield was little changed at 2.69 percent as of 6:51 a.m. in London from yesterday, when it rose 0.1 percentage point, according to Bloomberg Bond Trader prices. The 2.75 percent note due February 2024 traded at 100 17/32.

Yesterday’s jump in 10-year yields was the biggest on a closing basis since Nov. 8. They touched 2.59 percent on March 3, the lowest since Feb. 4. A break above 2.7 percent would “mark a near-term yield base,” Credit Suisse Group AG analysts David Sneddon and Christopher Hine wrote in research today.

Australia’s 10-year government bond yields rose for a second day, climbing six basis points to 4.06 percent after the nation’s economy expanded faster than estimated. Japan’s 10-year benchmark yield rose one basis point to 0.61 percent.

Crimea Crisis

Russia would use the military only in “an extreme case,” Putin said in a press conference yesterday, signaling the crisis that provoked a standoff with the West and roiled global markets won’t immediately escalate.

Russian intervention in Crimea, which the U.S. condemned as a breach of Ukraine’s sovereignty, sparked demand for bonds of developed countries from the U.S. to Japan for their perceived safety, overshadowing the prospect of higher yields as the U.S. recovery gathers pace.

Treasuries are on track for their best quarter since the three months that ended in June 2012 after turmoil in emerging markets from Argentina to Turkey spurred demand for haven assets. The Bloomberg U.S. Treasury Bond Index (BUSY) has gained 1.8 percent since the end of last year.

U.S. Jobs

U.S. employers hired 150,000 workers in February, after adding 113,000 in January, according to a Bloomberg News survey before the Labor Department releases the figures on March 7. A report from ADP Research Institute today will show companies boosted payrolls by 155,000 last month after an increase of 175,000 in January, a separate Bloomberg poll estimates.

Employment gains for December and January were both less than economists forecast, depressed by winter storms.

“There’ll be some pretty severe weather impact on payrolls, making it another month of hard to interpret numbers,” said Ferguson Wellman’s Fovinci. “There are no roadblocks in the way of economic growth that we’ve seen.”

Federal Reserve Chair Janet Yellen reiterated on Feb. 27 that the central bank is likely to keep curtailing its stimulus. The central bank said on Dec. 18 it would trim its monthly bond purchases to $75 billion from $85 billion, before cutting by another $10 billion in January. The purchases are designed to hold down long-term borrowing costs and spur economic growth.

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