The Last Days of Summer

by Ralph Cole, CFA Executive Vice President of Research

Stronger The U.S. economy was indeed stronger than first reported in the second quarter as estimates were revised higher this week when the commerce department reported that the U.S. economy grew 4.2 percent during the quarter. This pace fits with our narrative that the U.S. economy is truly getting healthier, particularly in the aftermath of a very harsh winter.

In fact, there was a lot to like about most of the economic reports this week. For example, durable goods orders grew 22 percent, led by airplanes; unemployment claims came in again under the 300,000 mark - yet another example of vitality in the labor markets; auto sales for the month of July were robust at over a 16 million annual rate of sales. In summary, current economic statistics suggest a sustainable expansion with moderate inflation.

Witchcraft Black magic may be the only explanation for ultra-low interest rates in the face of sound economic numbers. Our industry heuristic states that strong economic growth ultimately must translate into higher interest rates. Not so fast my friend. While the U.S. economy is growing quite nicely, Europe is suffering from falling growth rates, and plunging inflation which has contributed to record lows in interest rates throughout the Eurozone. For example, Germany’s 10-year bund fell to a .88 percent yield while 10-year debt yields touched 1.24 percent in France and hit a 2.22 percent in Italy. With European Central Bank chief Mario Draghi’s most recent speech in Jackson Hole last week, he essentially took perceived credit risk off the table for the Eurozone. With a compelling endorsement of U.S. style quantitative easing on the horizon, investors clearly are (for the time being) comfortable holding European debt.

Lower rates throughout the Eurozone have effectively put a bid under U.S. bonds. In the global market for debt, savers view U.S. debt as a good deal at these levels and continue to buy. Studies estimate that the downward pressure on U.S. rates from lower European rates is anywhere from 20–30 basis points. As you can see from the chart below, U.S. 10-year yields are at their outer-bounds relative to the yield on the 10-year German bund.

Our Takeaways for the Week

• The U.S. economic expansion has taken hold, and looks to be sustainable throughout the second half of 2014
• Lower interest rates around the world and continued quantitative easing by the Fed has kept a lid on interest rates … for now
• The end of summer brings the anticipation of football season, and the end to QE infinity

Disclosures

Ferguson Wellman's Monthly Blog for Oregon Business

Read the blog authored by Ferguson Wellman's Jason Norris @OregonBusiness. http://ow.ly/AI8NU Disclosures: http://ow.ly/AI8P2

The Talking Heads

by Shawn Narancich, CFA Executive Vice President of Research

A good indicator of financial markets adjusting to a slower rate of news flow is the frequency with which the same stories are replayed and debated in the financial press and on television. With retailers now wrapping up second quarter earnings season, Wall Street strategists and commentators have resorted to debating ad nauseum what will happen to short-term interest rates once the Fed ends its program of quantitative easing. Minutes of the latest Fed meeting this week revealed that the Fed will remain data dependent, letting incoming economic reports and anecdotal Beige Book reports tell the story of progress for the economy in general and for the labor markets and inflation in particular.

On the latter topic, policy makers received reassurance this week that inflation is not presently a problem, as headline CPI numbers came in spot-on with the Fed’s 2.0 percent target. Tame inflation indicates that labor markets, absent select areas in energy and manufacturing, still contain the sufficient slack necessary to boost output without spurring a wage spiral. As the old saw says, time will tell. In the meantime, investors seem to be tuning out the chatter as they bid equities to new record highs.

Like Sands Through the Hour Glass. . .

Believe it or not, we’re now halfway through the third quarter and, once again, the error of estimates appears to be on the downside with regard to economic growth forecasts. While this week’s housing statistics were encouraging, with July new housing starts up 16 percent sequentially, a key fly in the ointment was last week’s retail sales report, which came in flat with June numbers and continued a disappointing trend of sequentially slowing retail sales since May. At a time when international headwinds are increasing thanks to Europe teetering just above stall speed and China continuing to undergo a growth-slowing transition away from excessive investment, our forecast for 3 percent GDP growth domestically is starting to feel just a bit optimistic.

Ka-Ching!

As tempting as it might have been to write-off last week’s poor retail sales report as a statistical anomaly when juxtaposed against increasingly positive employment numbers, considerable anecdotal evidence from retailers reporting fiscal second quarter numbers affirms the data. Two key bellwethers of American retailing – Wal-Mart and Target – both reported earnings declines on moribund U.S. sales, and investors have consistently overestimated the companies’ earnings power over the past six months. In addition, Macy’s surprised investors by uncharacteristically missing numbers and lowering sales guidance. Alas, this week brought some better news on the retailing front, with Home Depot reporting strong sales and earnings coupled with a boost to their full year earnings forecast. In contrast to the drubbing that Macy’s took, stock of the home improvement leader broke out to new all-time highs. Similarly, off-price merchandisers T.J. Maxx and Ross Stores both outperformed Wall Street expectations and were accordingly rewarded by investors. With retail earnings reports nearly wrapped up for the quarter, we observe that results are hit and miss, and that investors are best served to take a rifle shot approach to owning specific names advantaged by key trends in retail.

Our Takeaways from the Week

• Stock prices remain resilient despite mixed economic data and geopolitical turmoil globally
• Retailers are book-ending another quarter of better-than-expected earnings in general, though one with more cross-currents below the surface

Disclosures

Sanford and Son: Bonds Hit a Rough Patch

by Brad Houle, CFA Executive Vice President

Sanford and Son was a TV series in the 1970s about a disagreeable junk dealer and his adult son. In one reoccurring gag in the series the main character, Fred Sanford, would dramatically grab his chest and exclaim, "Oooo….It’s the big one….You hear that, Elizabeth… I'm comin' to you."  This simulated heart attack was perpetrated by the Fred Sanford character to make his point when exasperated and was always a false alarm. Recently, the junk bond market hit a rough patch with investors exiting junk bond funds, causing bond prices to decline. The question at hand is, is this correction "the Big One," meaning a new credit crisis, or simply a minor correction akin to the dramatic fake heart attack that Fred Sanford used to torture the other characters on the show?

Bonds that are below investment grade are often referred to as junk bonds due to the lower credit quality of the companies issuing the bonds. Junk bond is somewhat of a pejorative description of an important part of the bond market. Small companies that are growing, which is a large engine for the U.S. economy, often fit into the category of below investment grade credit. It is important that there are public market debt financing options available for these entities. Because of the lower credit quality, investors demand more compensation in the form of interest in order to loan these companies money. Also due to the lower credit quality, there is a higher potential default risk for these bonds.

Recently, there has been an outflow of money from high yield bond funds as investors have become nervous about the risks of below investment grade bonds. With interest rates being so low for an extended period of time, the hunt for yield by investors has been intense. Money has been flowing into the type of investments that can offer a higher income than the traditional bond market. Below investment grade bonds have been one of the asset classes that has benefitted from this cash flow. As a result, the prices of high yield bonds have been bid up and the resulting yields are down because they move inversely to one another.

The higher the risk in a bond, the higher the yield should be to compensate for the risk. The way risk is measured in high yield bonds is the yield spread over U.S. Treasury bonds. Bonds issued with the full faith and credit of the U.S. Government are considered to be riskless with respect to default. High yield bonds can default and, as a result, investors receive additional interest over a treasury bond to compensate for that risk. For example, if a U.S. 10-year Treasury bond is yielding 3 percent, a high yield bond should yield 8 percent, given the historical relationship. Traditionally, the average spread between high yield bonds and U.S. Treasury bonds is 5 percent. With the insatiable demand for income, high yield bond prices have risen to a point where investors are only getting 3 percent more interest than treasury bonds.

Our view is that this is a normal correction that has more to do with the recent stock market volatility than credit quality. The high yield market is often more closely correlated with the stock market as opposed to the bond market.  On average, the underlying credit quality of high yield bonds is better than average as evidenced by the default rate. According to Standard & Poor’s, the default rate on high yield bonds has recently been around 2 percent, well below the long-term average of just over 4 percent.

With the strong demand for high yield bonds, the valuation probably did get extended; however, we don't believe this is the start of another credit crisis.

Our Takeaway for the Week

• Geopolitical events continue to drive equity and bond market volatility

Disclosures

Summertime Blues

by Jason Norris, CFA Executive Vice President of Research

Recent weakness in the S&P 500 has led to a lot of chatter regarding the inevitable pullback in equities. While the last few weeks have exhibited some weakness, stocks are still up close to 5 percent, year-to-date. While the United States continues to show improving growth, as seen in recent jobless claims and the Purchasing Managers Index (PMI), global political affairs have wound the markets tight. Russia continues to make noise in the Ukraine while the Middle East is demonstrating that nothing has (nor will) changed for decades. This uncertainty coupled with growth concerns in both China and Europe has led to a rally in bonds as well as a minor sell-off in equities.

The 10-year Treasury now yields just above 2.4 percent, which is the lowest in over a year, as global investors flock to the U.S. dollar and park cash in “risk free” assets. This flow of funds has resulted in weakness in equities. U.S. equities are down close to 4 percent from recent highs which have led to some talking heads focusing on an impending sell-off. However, these 2 to 5 percent pullbacks are normal in bull markets. For instance, over the last 30 months, we have seen nine 2+ percent pullbacks, but the S&P 500 is up over 60 percent in that period. What we continue to watch is improvement in the U.S. economy, growing corporate revenues and reasonable valuation. The current environment is favorable for all of those.

Messin’ with a Hurricane

This week brought the first hurricane to the Hawaiian Islands in 22 years, as well as a “storm of headlines” regarding U.S. companies relocating offshore. The equity market was not too happy with Walgreens’ decision earlier this week not to seek a “tax inversion” with its pending acquisition of Alliance Boots in Switzerland. While domiciling in Switzerland would have saved Walgreens billions of dollars in tax expenses, the company decided stay committed to the state of Illinois. There is speculation that the Obama administration’s use of the bully pulpit was a key factor in management’s decision to continue to pay higher taxes. We believe that an inversion would be more difficult for Walgreens to pull off since most of their revenues are generated in the U.S., thus no offshore cash to repatriate. On the other hand, companies like Abbvie and Medtronic have meaningful amounts of international business, thus their “inversion” acquisitions (Shire and Covidian, respectively) would be easier to justify.

What this recent trend highlights is the need to restructure the U.S. tax code so companies can be more competitive globally. While many of these deals may still be pursued, the tax savings is a key attribute in the overall structure. What can’t get lost in the noise is that although U.S. companies may change their mailing address, they will still bring their offshore cash back to the U.S. and reinvest domestically. With a mid-term election this year, major tax reform may not happen at least until 2015, and possibly not until after the 2016 presidential election.

Too High to Fly

A few weeks ago, the state of Washington started selling recreational marijuana which coincided with the cracking of the high-yield bubble. High-yield bonds have been a strong performer over the last several years; however, like stocks, the month of July hasn’t been friendly to the high-yield market. Spreads have started to increase in the face of lower Treasury yields. This culminated with over $7 billion exiting high-yield funds last week. We don’t believe this is a “canary in the coal mine” with respect to corporate America; however, we are watching it closely. High-yield bonds are trading at historically tight levels, just over 3 percent above Treasury yields, as investors seek income. The long-term average spread has been close to 6 percent higher than Treasuries. Therefore, we would not be surprised if that market continues to show poor performance as we revert back to the mean. While, there are times we may venture into lower rated bonds, we believe that the market as a whole is a bit rich and would wait for spreads to widen further before we allocate additional capital.

Our Takeaways for the Week

• Minor equity pullbacks are common and investors need to stay focuses on the fundamentals
• While July saw a “risk-off” market, we still believe equities will outperform bonds for the rest of 2014

Disclosures

Lazy Hazy Crazy Days

by Ralph Cole, CFA Executive Vice President of Research

Although this time of year is often described as the summer doldrums, that certainly was not the case this week. Earnings, the Fed and economic data dominated the tape … and made for interesting market activity.

All Along the Watchtower

Fed-watching during a time of taper is an essential part of managing money these days. The Federal Open Market Committee (FOMC) announced on Wednesday that they would continue to taper their purchases of Treasuries and mortgage-backed securities by an additional $5 billion each this month. The Fed continues on pace to stop all security purchases by October. While they made mention that there is still slack in the labor market, the Fed must be comforted by the consistency of job growth in 2014. The U.S. has added an average of 230,000 jobs per month this year versus 194,000 per month in 2013. Commentary after their two-day meeting continues to signal that they are on pace to begin raising rates in the middle of 2015.

Too Hot?

The Bureau of Economic Analysis reported that U.S. GDP grew 4 percent during the second quarter. This robust growth and some of the comments by the Fed may have spooked investors this week into thinking that the Fed will raise rates sooner than expected. We believe this was more of an excuse for a sell off rather than a good reason for selling stocks. There will be volatility in the stock market as we move into next year and the Fed communicates their outlook. In the end, we believe that they will be raising rates for the right reasons … the economy is getting better and extraordinary stimulus is no longer needed.

Upside Down

Earnings season is always one of the more volatile times of the quarter. While earnings have come in very strong (7.7 percent growth up to this point), seemingly minor misses are punished unmercilessly. The healthcare sector has provided the biggest positive surprise for the quarter. Thus far, healthcare companies have reported 14.8 percent growth. On the other end of the spectrum, consumer discretionary companies have only reported 2.9 percent earnings growth.

Our Takeaways for the Week

• Focus on the Fed will continue to cause volatility in the market in the coming months. We believe it is more important to focus on the overall trajectory of the economy to determine direction of the stock market
• Companies continue to grow earnings at an impressive rate despite sub-par global growth

Disclosures

Brad Houle Article in Portland Business Journal

Brad Houle, CFA, executive vice president of research, recently authored a by-line article that was included in the Portland Business Journal’s 2014 Wealth Management and Financial Services Guide. This publication is sponsored annually by the CFA Society of Portland.

In the article, Houle states, “While bonds do not offer a compelling value at this point, they are a necessary component of many portfolios for both individual and institutional investors.” Houle is a member of Ferguson Wellman’s fixed income team and manages the firm’s REIT investment strategy.

Click here to read “A yield austerity; how not to get burned in the bond market.”

Disclosures

Full Speed Ahead

by Shawn Narancich, CFA Executive Vice President of Research

 Unexpected Returns

Despite serious turmoil in the Middle East and ongoing conflict in eastern Ukraine, blue-chip stocks have pushed to new record highs amid upbeat quarterly earnings and encouraging economic data. As Wall Street frets about why interest rates are so low, investors are also enjoying what has turned into a nice coupon-plus return environment for bonds this year, one that could continue to confound those expecting higher rates. Indeed, the CPI report out this week provides evidence that a 2.1 percent inflation rate may trend lower over the next few months if commodity prices continue to moderate.

Gasoline prices accounted for two-thirds of the June index increase, and with pump prices now on their way back down, consumers should expect to get a break at the pump and investors a break on headline inflation. Just as important, natural gas prices have fallen precipitously in the past month due to better-than-expected storage refills and grain prices falling under the expectation of record harvests this fall. With wage gains remaining muted and investment-grade bond yields at surprisingly low levels in Europe, bond investors expecting materially higher rates could be surprised by a rate environment that stays lower for longer. We see an environment of muted inflation and accelerating U.S. economic gains creating a profitable backdrop for equity investors.

A Jobs Renaissance?

Supporting the notion of improving economic fundamentals was this week’s jobless claims number, which breached the psychologically important 300,000 level to the downside. U.S. claims trickled in at a rate of just 284,000 in the past week, a level investors haven’t witnessed in over eight years. This bullish claims number and the downward trending four-week moving average lend credence to the strong payroll numbers reported in June, while increasing our confidence that July’s report will be another good one.

Holy Chipotle!

As more people find work, consumption spending should increase, but as the results from McDonalds and its former subsidiary Chipotle Mexican Grill showed this week, where consumers choose to spend their new-found incomes can be as different as, well, burgers and burritos. McDonalds disappointed by reporting falling same-store sales, but Chipotle announced a 17.3 percent surge, the likes of which it hasn’t seen since 2006. Store traffic at the Golden Arches has lagged and McDonald’s contends with a lower income demographic for which pricing is always an issue. In contrast, Chipotle’s higher income constituents are more likely to accept occasional menu price hikes as they did in the second quarter, without chasing away customers. Indeed, Chipotle benefitted from a trifecta of good fortune – higher prices, better mix, and more store traffic that collectively produced 24 percent earnings growth. On much better-than-expected sales and earnings, Chipotle’s stock surged 12 percent while McDonalds’ shares fell 1 percent.

With about half of the S&P 500 having reported second quarter results, approximately 75 percent of companies are delivering better-than-expected earnings, and 65 percent are also besting top-line estimates. As a result, earnings projections for the benchmark index that a month ago predicted 4 percent growth for the quarter now stand at 6 percent.

Our Takeaways from the Week

• Despite stiff geopolitical headwinds, U.S. stocks continue to forge new highs
• A majority of companies reporting so far are delivering better than expected second quarter sales and earnings

Disclosures

Jason Norris Discusses Microsoft Restructuring on KGW

Jason Norris, CFA, spoke with KGW’s Joe Smith to share his thoughts on the impact of Microsoft’s restructuring from an investor’s perspective.  Please click here to see the video.

Take Me to the Top

by Jason Norris, CFA Executive Vice President of Research

Take Me to the Top

The most common question we have been getting as of late is when is the market pullback going to occur? Stocks are up over to 200 percent from the March 2009 bottom and 75 percent from the most recent market correction (of 15 percent) in October 2011. While it has been almost three years since a major correction, history has shown this trend can continue for quite a bit longer. To that point, Cornerstone Macro Research gathered some data on previous market pullbacks which are highlighted in the chart below.

History shows that there have been numerous periods of much longer durations when stocks have climbed without a major pullback. If you simply look at the fundamentals of the stock market, an argument can be made that the S&P 500 can continue to move higher without a meaningful pullback. First, U.S. economic growth is improving and global GDP should continue to trend in the mid-single digits, resulting in continued earnings growth. Second, with low inflation and low interest rates, the valuation of the equity market is still attractive and the Price-to-Earnings multiple of the S&P 500 still has room for upside from 15.6x at present. While there will always be unforeseen shocks, the risks in the system are not as predominate as we saw in 2011 (Europe debt crisis, U.S. debt downgrade, Fiscal austerity) or 2000 (stretched valuation, falling consumer sentiment, manufacturing data weakening). However, risks that investors should be cognizant of are a spike in oil prices due to Middle East tensions, China’s economic growth slowing meaningfully, and an adverse reaction to Federal interest rate hikes in 2015.

What Do You Do For Money?

Earnings kicked off this week with mixed results from large cap technology. Specifically, there was divergence within the internet ad space, with Google growing and Yahoo stagnant. One wonders how long the Yahoo board will give CEO Marissa Mayer to achieve the turnaround. Intel delivered a strong quarter due to PC upgrades primarily from businesses as Microsoft sunsets its client support for Windows XP. This strength is allowing the company to return cash to shareholders through an announced $20 billion repurchase plan. While Intel stock reacted very favorably to the announcement, it was disconcerting that their mobile business continues to underachieve. This division lost over $1 billion while grossing a mere $51 million in revenue (down from $292 million a year ago). Intel’s move into this area looks to have been a failure which leads us to speculate where they will have to make an acquisition in order to penetrate the market.

Takeaways for the Week

• The start of the earnings season has resulted in no major market moving results
• Tensions in the Middle East and Ukraine may have a minor effect on U.S. markets, and unless we see a spike in oil, they should not hinder economic growth

 Disclosures

Investment Outlook Video: Third Quarter 2014

We are pleased to present our Investment Outlook: Third Quarter 2014 video titled, "Back on Track." This quarter, Chief Investment Officer George Hosfield, CFA, discusses how despite starting the year with a winter-induced swoon, the equity markets have nearly realized the “average annual return” that we predicted in January for the entire year. That said, we believe that an improving labor market, a strengthening economy, rising earnings, low interest rates and reasonable multiples provide a backdrop for further equity gains.

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

jpeg of Q3 2014 Outlook video for email hyperlink

Sovereign Debt Risk in Europe Takes a Holiday

by Brad Houle, CFA Executive Vice President

We have illustrated below the details of the convergence of government bond yields between the stronger credits of Germany and the United States versus the weaker credits of Italy and Spain. Germany and the United States are arguably two of the strongest sovereign bond insurers in the world. While not perfect, both Germany and the United States have dynamic economies with reasonable levels of inflation versus economic growth. Also, both countries have excellent ability to pay their debts and are viewed as "safe haven" credits by bond investors.

Italy and Spain are a different matter. While we do believe that these countries are starting to recover from the European debt crisis, there are still many structural economic issues that need to be addressed. For example, Italy has a 12 percent unemployment compared to the six percent unemployment in the United States. However, Italy's unemployment looks very favorable compared to the 25 percent unemployment currently in Spain. In addition, both of these countries have severe demographic issues with aging populations and strict labor market regulations that make the labor force less flexible.

What changed to cause interest rates to drop from around the seven percent for a 10-year bond for Spain and Italy in 2021 to the less than three percent rate of interest they now pay were the actions by the European Central Bank or ECB. Essentially, the ECB, which is akin to the Federal Reserve for Europe, announced they would do whatever it takes to backstop these countries. These words gave bond investors the confidence that Italy and Spain will have the ability to honor their debt obligations. Financial markets run on confidence, and this was enough to cut the borrowing costs of these countries by half.

Countries compete for capital from investors. Investors strive to get the best return for the risk that they are taking. Given this set of facts, buying United States treasury bonds versus European country debt seems like a much better investment from a risk versus reward standpoint. While the words of the ECB do merit more investor confidence, there is still underlying credit risk that does not seem to be properly priced into European government debt.

This week there was an event in Portugal that highlighted this risk. During the European debt crisis, Portugal was in a similar position to Italy and Spain. Portugal had a heavily indebted economy with structural economic issues and a high cost of borrowing based on perceived credit risk. Portugal fell under the ECB umbrella and their borrowing costs have declined in a similar fashion to Spain and Italy. However, this week Portugal's Banco Espirito Santo announced that they were having issues meeting debt payments on some short-term borrowing the bank had done to fund operations. This news was enough to cause a one day .30 percent increase in the yield of the Portuguese 10-year bond and a broader decline in European stock markets. While relatively minor, this incident demonstrates the market confidence in European sovereign debt markets is on the razor's edge and credit risk is probably not properly reflected in the possible risk of this debt.

Our Takeaways for the Week

• U.S. Treasury debt is more attractive than European sovereign debt

• While we do believe interest rates will rise in the U.S. as economic growth continues, there is a cap on how high interest rates will climb. Investors will favor U.S. Treasury bonds over European bonds which will help keep rising rates in check

Disclosures

2014 Q2 Market Letter

Please click here to find our Market Letter Second Quarter 2014. We hope you find our economic insights interesting and informative.  

Living in America

by Ralph Cole, CFA Executive Vice President of Research

Over When It’s Over

It has been quite a week here in the U.S. on a number of fronts. First, the U.S. men’s soccer team brought society to a halt on Tuesday afternoon with a heartbreak loss to Belgium in the second round of the World Cup. While the game showed just how far we have to go to catch up to the rest of the world, the team made all their supporters very proud. It will be interesting to see if the current soccer enthusiasm will have the “legs” to build on this momentum in the U.S. beyond the conclusion of the World Cup.

What’s Going On

As for the markets, they did not take the holiday-shortened week off as the Labor Department announced May payrolls a day early in observance of the Fourth of July. The numbers were unabashedly strong with a whopping 288,000 jobs added across the nation in May. This strong reading moved the five-month average up to 248,000 which is roughly 60,000 more than we averaged in all of 2013. Perhaps most impressive is the fact that this was during one of the worst winters on record.

Contrary to just two months ago, all signs now point to an improving economy, but headline GDP numbers have been surprisingly weak. Mark Twain once said, “There are lies, damn lies and statistics.” As investors, we can’t rely on any one statistic to determine the direction of either the economy or the capital markets. Rather, we rely on a mosaic of information that is force-fed to us each day through our computer screens. What that information is telling us today is that we have moved from a tentative expansion to one that appears sustainable. While some may lament the speed of the recovery and robustness of economy, we would point to a lack of excess in any given area.

While consumer spending hasn’t been overly strong, it does appear to be durable because unlike recent economic expansions, this has been not driven by borrowing. While job growth has been somewhat sluggish, it also hasn’t reached inflationary levels. While housing has improved, it is far from the bubble levels experienced in 2005 and 2006 and while the stock market is at record highs, so too are earnings.

So sit back and enjoy it this Fourth of July holiday weekend. Next week we can get back to worrying about an Iraq oil shock, inflation and stock market valuations.

Our Takeaways for the Week

• Strong job growth led the Dow to break 17,000 for the first time
• While the U.S. and the UK are leading this recovery, neither remain in contention for the World Cup

Disclosures

Financial Times Ranks Ferguson Wellman Capital Management on Top Registered Investment Advisers List

PORTLAND, Ore. – July 1, 2014 – Ferguson Wellman Capital Management was recently informed that the firm was named by Financial Times to their inaugural “300 Top Registered Investment Advisers List”. The Financial Times compiled the list of RIA firms by soliciting applications from more than 2,000 independent RIA firms who had $300 million or more in assets. They judged the firms on six categories which resulted in a numeric score for each adviser. The areas they took into consideration included assets under management, growth of assets under management, number of years the firm has been in existence, the number and depth of industry certifications of staff, the SEC compliance record of the firm and accessibility of the firm online. According to Financial Times, only independent and elite firms were considered for this designation and the average firm listed on the 300 list manages more than $2.5 billion in assets under management and serves over 3,000+ clients.

“Everyone at Ferguson Wellman is very gratified by our recent acknowledgement in the Financial Times. We appreciate being mentioned alongside our peers, but quite frankly what means the most to us is the trusting relationship that we continually earn with each client we serve,” said James H. Rudd, principal and chief executive officer.

Founded in 1975, Ferguson Wellman Capital Management is a privately owned registered investment adviser that serves over 650 clients with assets starting at $3 million. The firm works with individuals and institutions in 35 states with a concentration of those clients in the West. Ferguson Wellman manages $3.9 billion that comprises union and corporate retirement plans; endowments and foundations; and separately managed accounts for individuals and families. In 2013, West Bearing Investments was established, a division of Ferguson Wellman, that serves clients with assets starting at $750,000. All company information listed above reflects 3/31/14 data.

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Methodology and Disclosure: The 2014 Financial Times Top 300 Registered Investment Advisors is an independent listing produced by the Financial Times (June, 2014). The Financial Times 300 is based on data gathered from RIA firms, regulatory disclosures, and the FT’s research. As identified by the Financial Times, the listing reflected each practice’s performance in six primary areas, including assets under management, asset growth, compliance record, years in existence, credentials and accessibility. Neither the RIA firms nor their employees pay a fee to The Financial Times in exchange for inclusion in the Financial Times 300.

Don't Stop Believin'

by Shawn Narancich, CFA Executive Vice President of Research

Don’t Look Back!

As investors question the underlying strength of the U.S. economy, stocks are consolidating gains and bonds are defying Wall Street expectations for yields to rise. Like drivers gawking at a car wreck as they drive past, market participants once again revisited the surprisingly poor economic start to a 2014 that most thought would bring faster economic growth instead of the worst quarterly performance since the depths of the Great Recession. Reasons for the 2.9 percent contraction in first quarter U.S. GDP have been widely discussed, but the cold, inclement weather and late Easter don’t negate the math of such a poor start to the year, and its impact on full year estimates that economists are now scrambling to reduce.

Back on Track

Relatively healthy payroll growth, rising retail sales, and healthy manufacturing indicators bely the wreckage of first quarter GDP, but this week’s surprisingly poor May personal consumption numbers prolong the debate about how strong the economy really is. Few indicators are as simple as they first seem and this number is no exception, being dampened by accounting for the Affordable Care Act that economists first thought would boost healthcare spending. As it turns out, this component of consumer spending actually fell in May, and with the Fed’s preferred inflation measure ratcheting up to 1.8 percent year-over-year, real consumption spending used to compute the GDP number actually dropped sequentially. So what’s an investor to believe?  Notwithstanding the disappointing May number, we expect Q2 consumption spending to increase at a faster pace and look for better capital spending and housing investment to produce GDP growth somewhere in the 3-4 percent range. If achieved, this level of growth will be the best in a couple years and should go a ways toward allaying concerns about the pace of economic expansion. In this environment, we expect bond yields to rise.

Clear as Condensate?

The U.S. energy industry was jolted this week by surprise news that the Commerce Department has granted approval for two energy companies to begin exporting very light crude oil known as condensate. The U.S. energy renaissance has boosted domestic oil production by over 70 percent since the lows of 2008 and, owing to the nature of unconventional development, an increasing amount of the liftings are of the clear variety. The challenge for U.S. refiners has been to revamp their capital intensive facilities to accommodate this light production after years of gearing up for heavier Mexican and South American imports. The reaction on Wall Street was dramatic, as stocks of oil producers rallied and refining stocks tanked. If the first government approvals this week turn out to be a harbinger of additional exports to come, benchmark WTI oil prices should increase relative to the global benchmark Brent. Accordingly, the producers would realize higher prices at the expense of the refiners, which have benefited greatly from the discount at which they buy U.S. light crude. Only time will tell whether additional export approvals are granted, but the risk for refining investors is not only that their feedstock costs increase, but that investments made in recent years to process lighter grade crudes fail to pay off.

Our Takeaways from the Week

• Q2 comes to a close, with stocks hovering near all-time highs as investors assimilate disappointing headline economic news into full year estimates
• Energy stocks are in focus following initial government approval for light crude oil exports

Disclosures

InvestmentNews Magazine Names Ferguson Wellman to Largest RIA and Biggest Gainers Lists

PORTLAND, Ore. – June 24, 2014 – Ferguson Wellman Capital Management is pleased to announce that the firm has been named to the Largest Fee-Only RIAs list and the Biggest Gainers list in the recent RIA Rundown 2014 issue in the June issue of InvestmentNews magazine. Ferguson Wellman is ranked 38^th and 22^nd, respectively. For the Largest Fee-Only RIA list, InvestmentNews qualified the list of RIA firms based on the data the firms provided in Form ADV to the Securities and Exchange Commission in 2014. Many criteria were considered for the listing, among them the total of assets under management must be at least $100 million, firms must provide financial planning services and neither the firm nor its representatives may be actively engaged in business as a representative of a broker-dealer. The Biggest Gainers list was compiled by calculating the percentage of growth in total assets by the 50 largest fee-only RIAs. Ferguson Wellman is notably the only firm listed in the Pacific Northwest.

“While it is always gratifying to be mentioned alongside your peers when it comes to assets under management and percentage gained year over year – what is most important to us is the trusting relationships we have earned with each of our clients. After all, it is their assets that have allowed us to be mentioned in the first place,” said Jim Rudd, principal and chief executive officer.

Founded in 1975, Ferguson Wellman Capital Management is a privately owned registered investment adviser that serves over 650 clients with assets starting at $3 million. The firm works with individuals and institutions in 35 states with a concentration of those clients in the West. Ferguson Wellman manages $3.9 billion that comprises union and corporate retirement plans; endowments and foundations; and separately managed accounts for individuals and families. In 2013, West Bearing Investments was established, a division of Ferguson Wellman, that serves clients with assets starting at $750,000. All company information listed above reflects 3/31/14 data.

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Methodology:

InvestmentNews qualified 1,442 firms headquartered in the United States based on data reported on Form ADV to the Securities and Exchange Commission as of May 1, 2014. To qualify, firms must have met the following criteria: (1) latest ADV filing date is either on or after Jan. 1 (2) total AUM is at least $100M, (3) does not have employees who are registered representatives of a broker-dealer, (4) provided investment advisory services to clients during the most recently completed fiscal year, (5) no more than 50% of regulatory assets under management is attributable to pooled investment vehicles (other than investment companies), (6) no more than 25% of amount of regulatory assets under management is attributable to pension and profit-sharing plans (but not the plan participants), (7) no more than 25% of amount of regulatory assets under management 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), (11) is not actively engaged in business as a registered representative of a broker-dealer, (12) 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.

Regarding Biggest Gainers:

Rankings are based on unrounded figures and on the 50 largest fee-only RIAs. InvestmentNews qualified 1,442 firms headquartered in the United States based on data reported on Form ADV to the Securities and Exchange Commission as of May 1, 2014. To qualify, firms must have met the following criteria: (1) latest ADV filing date is either on or after Jan. 1 (2) total AUM is at least $100M, (3) does not have employees who are registered representatives of a broker-dealer, (4) provided investment advisory services to clients during the most recently completed fiscal year, (5) no more than 50% of regulatory assets under management is attributable to pooled investment vehicles (other than investment companies), (6) no more than 25% of amount of regulatory assets under management is attributable to pension and profit-sharing plans (but not the plan participants), (7) no more than 25% of amount of regulatory assets under management 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), (11) is not actively engaged in business as a registered representative of a broker-dealer, (12) 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.

Visit data.InvestmentNews.com/RIA for more complete profiles and financials.

What the Fed Said

by Brad Houle, CFA Executive Vice President

Investors hang on every single syllable of every utterance by the Fed Chairperson, and to a lesser extent, speeches given by the members of the Federal Reserve Board. While one cannot minimize the importance of what the Federal Reserve does, it is probably the most overanalyzed organization in the world today - only overshadowed by the attention placed on the Kim Kardashian and Kanye West marriage by the tabloids. Gone are the days when the Greenspan "briefcase indicator" on CNBC attempted to predict the outcome of Fed meetings based upon how thick former Chairman Greenspan’s briefcase appeared to be when he headed into the meetings. While the “briefcase indicator” was mostly in jest, it points to the obsession of investors and the media on the outcome of these meetings.

There are some reasons why all this attention on the Fed is warranted – just not at the level it experiences today. The Fed does have control of the Federal funds rate and has been impactful in lowering longer-term interest rates via quantitative easing. However, the Fed's real influence comes in the form of managing the market expectations by what is said. In fact, setting expectations by what is said is perhaps more important than what the Fed actually does in many cases. While the Fed needs to have the authority to back up what it is signaling to the market, the way in which they suggest the direction of how they are moving policy is the most important factor.

One recent example of this “power of suggestion” occurred last summer. At the time, then-Fed Chairman Ben Bernanke made a statement in a post-Fed meeting press conference that tapering of quantitative easing would begin in the near future. This announcement caused interest rates to move sharply higher in anticipation of the tapering which was probably beyond the intention of Chairman Bernanke. In fact, even the notion that there must be post-meeting press conferences is a relatively new phenomenon. Originally, the stated reason for the press conferences was to increase transparency. The less publicly-stated reason was to have a platform available to set expectations.

The Fed statement on Wednesday, June 16, was nothing new. The Fed commented that while unemployment has come down, it is still elevated. However, household and business spending is on the rebound. The Fed also repeated that the tapering of quantitative easing will continue and interest rates should stay low for a long time. This theme continued during the post-meeting press conference where Chairperson Yellen carefully answered reporter questions while taking pains not to add new expectations. No new news was the market expectation going into the meeting, so there was essentially no reaction by the stock or bond market from the Fed meeting minutes and subsequent press conference. Now the markets will turn their hyper vigilance toward future meetings and Fed speeches.

Our Takeaways for the Week

• Low interest rates are not a permanent condition. As the economy and labor market heal we anticipate interest rates will drift higher over the next two years. This should be good news for savers and investors.
• The market will continue to focus on any perceived change of Fed messaging.

Disclosures

Slow Ride

by Jason Norris, CFA Executive Vice President of Research

Slow Ride

This week, the World Bank lowered their global GDP assumptions for 2014 to 2.8 percent from 3.2 percent. The bank cited the BRICs (Brazil, Russia, India and China) as well as the U.S. as culprits for the lowered estimates. We believe the slowdown in the U.S. is solely a first quarter event due to weather, and we expect to see acceleration throughout the year. China’s growth, though slowing, is still relatively robust and inflation remains under control. Regrettably, Brazil and Russia have not fared as well. As the chart below highlights, Brazil and Russia are stuck in a slowing growth, high inflation environment that is difficult to overcome. With high inflation, there is pressure to raise interest rates, but that leads to increased headwind for growth.

Unfortunately for Brazil, the build up for the World Cup has not provided the added stimulus that was hoped for. Corruption and cronyism have proved to be rampant and the economy has not seen the desired lift. There was the expectation that the employment opportunities would bring about an economic boost for their citizens. However, this hasn’t happened and there remains strong sense of frustration among the public.

London Calling

Earlier this week, there were protests centered in London (with minor demonstrations in Paris and other European cities) due to the growth of the online transportation company, Uber. This company is disrupting the “old” taxi cab model by allowing customers to access drivers of vehicles for hire through a mobile app. This disruption allows consumers to by-pass the classic taxi for a private hire, which in many instances, may be cheaper and more convenient. The company started in San Francisco and is expanding globally.

The protests may have had an unintended counter effect. A lot of the general public, especially in Europe, have not heard of Uber, thus these actions just put the start-up on the front pages. Competition for the general public is usually a good thing in pushing prices down and improving service. However, as a CNBC reporter stated, the French public are in favor of the protests, but that doesn’t come as a surprise “in a country where competition is not really a key word and where a strike is probably some sort of national sport.”  On a final note, Uber recently completed a round of financing which valued the company at close to $18 billion.

The Mob Rules

While stocks hit new highs at the beginning of the week, geopolitical issues in the Middle East have tempered those gains. With militants gaining control of key cities in Iraq, the supply of oil has now come into question. This has resulted in a run up in the price of crude. We are of the belief that the price of oil will remain stable as the U.S. continues to increase its supply over the long term. However, we will continue to experience short term volatility due to global tensions and we remain overweight the energy sector based on our thesis that the global economy remains in expansion mode. This recent spike has resulted in the sector being the best performer this last week.

Takeaways for the Week

• Key emerging markets are struggling with flagging growth and high inflation and investors have to be selective
• In aggregate, global growth is still healthy and the U.S. should lead the developed world
• The U.S. will make it out of the first round of the World Cup and Germany will win it all

 Disclosures