One Thing Leads to Another

by Shawn Narancich, CFAExecutive Vice President of Research

Too Much of a Good Thing?

As Europe begins to make a down payment on its one trillion euro quantitative easing program, the U.S. dollar’s rapid gains have become parabolic and begun to take a dent out of investors’ U.S. stock portfolios. A strong currency is commonly cited for its endearing qualities of reducing inflation and attracting investment, but with the trade-weighted dollar up almost 25 percent since last summer, more and more companies are watching their bottom lines suffer as foreign profits get translated into fewer dollars. We would observe that when an asset’s orderly gains begin to rise at an accelerating rate, the asset is beginning to resemble a bubble, regardless of whether it is tech stocks in early 2000 or the dollar at present.

Bidding Adieu to ZIRP

Because the U.S. economy continues to outpace those of other developed nations at a time when the Fed is preparing to raise interest rates, we aren’t calling for a top on the dollar, but we do believe it is due for a breather. What we would conjecture is that the best of the greenback’s gains may have already been realized, acknowledging that while the Fed’s mandate to promote full employment is being realized, it is in danger of falling short of its other goal, that of maintaining stable prices (defined roughly as two percent inflation). We envision lift-off from the Fed’s zero interest rate policy (ZIRP) later this year, but with inflation increasingly subdued at the imported goods level in addition to that caused by lower oil prices, the Fed is unlikely to tighten as aggressively as the dollar would imply.

Skate to Where the Puck Will Be

We observe in bemused fashion the financial press waxing bearish about the supposed lack of storage capacity for U.S. oil production. Yes, storage builds have occurred at the Cushing, Oklahoma delivery site for the commonly quoted West Texas Intermediate (WTI) oil contract, as an unusually large amount of refining capacity has been temporarily idled for seasonal maintenance and one northern California refinery is offline because of the United Steelworkers’ refinery strike. This too shall pass. With gasoline refining margins now surpassing the robust level of $30/barrel (thanks to strong demand stimulated by low pump prices and discounted WTI oil), refiners are heavily incented to return idled capacity as soon as possible.

Always Darkest Before the Dawn

Are oil prices at a bottom today? Markets tend to overcorrect on the way up and do the same thing on the way down, so although fundamentals of the oil market don’t appear to support $45/barrel oil for any substantial length of time, the price of oil could go lower in the next month or two. But we don’t manage client portfolios with a one or two month time horizon and what we will say is that this cycle is playing out just like we would expect. U.S. drilling activity has plummeted in response to low oil prices, down 42 percent since September, while demand for gasoline, diesel and jet fuel hasn’t been this robust in years. By our estimation, faster demand growth and U.S. production that we believe is set to begin declining are the key ingredients to a recipe for higher prices in the second half of this year. Being overweight energy stocks has not felt good lately, but we are confident that the bearish headlines on oil herald something much more constructive for energy investors.

Our Takeaways from the Week

• Increasingly heady dollar gains are beginning to negatively impact U.S. stock prices

• The most recent declines in oil appear long in the tooth

Back in Time

by Jason Norris, CFA Executive Vice President of Research

In the last few weeks we have received several questions regarding the headlines coming out of Washington that may have major implications to some sectors of the market (although none of the questions were regarding Israeli Prime Minister Netanyahu’s address to Congress).

The FCC issued a statement that they are going to enact Title II of the 1934 Telecom Act (yes, 1934) to apply to broadband internet. This basically would regulate internet access, as well as any deals companies may make to transmit data (i.e., if Netflix were to strike a deal with Comcast, this would have to be blessed by the FCC). We haven’t seen the specific details of the act since the actual 300 page order has not been released. I had the good fortune of meeting with top managers of Verizon, Comcast and Charter Communications earlier this week and they addressed the topic. While the carriers have not been engaging in practices the FCC is trying to stop, this new regulation will introduce increased uncertainty. Network service providers have essentially had an open playing field as to what to invest in based on market dynamics. This proposed increase in regulation may present a lot of obstacles and conjecture. The consensus view is that new regulation would have a negative impact on innovation and investment longer-term. Also, the issue would be heavily litigated as well. The belief is that net neutrality needs to come through Congress, not the FCC. The DC Court of Appeals has previously overturned the FCC’s attempt to regulate in 2010 and 2014.

The winners of this move will likely be companies that drive a lot of data over the internet, i.e. Netflix and Hulu. Google is a wild card because they drive a lot of data transmission (YouTube) and they are expanding into telecom services (Google Fiber). Thus Google will see both the positive and negative sides of this proposed regulation. Apparently, Google execs had mentioned to President Obama that they are against net neutrality. The potential losers of the act would be the cable and telecom companies and their equipment suppliers if capital spending is slowed. However, the market didn’t bat an eye due to the amount of guesswork remaining before any implementation occurs.

You Keep Me Hangin' On

The Affordable Care Act (ACA) was before the Supreme Court again this week as challengers of the law asked the justices to find the subsidies (tax credits) the IRS is approving unconstitutional. The law states that only customers on a State-run exchange will get a tax credit; however, the IRS has been giving tax credits to all customers on both Federal and State exchanges. The majority of newly insured customers are on Federal exchanges and are receiving credits from the IRS, which would mean their insurance costs could increase meaningfully if this aspect of the ACA is overturned.

After the arguments were made on Wednesday, most legal analysts were unable to get a “read” from the justices on which way were they were leaning. The expectation is that the four “progressive” justices will vote in favor of the government, and the more “conservative” justices, Scalia, Thomas and Alito, will likely vote in favor of the plaintiff. The last challenge to the ACA was in 2012 where Chief Justice Roberts voted in favor of the act, so he could be the swing vote again. However, Justice Kennedy gave the defense a bit of hope due to his questioning of States’ Rights. The essential question is this: if the Federal government mandated the States to set up their exchanges to get its citizens subsidies, would that result in undue “coercion”? Thus maintaining the subsidies for the Federal exchanges may be allowed. It was an interesting line of questioning, and one that moved the HMO and hospital stocks this past week. The HMOs and hospitals will continue to be beneficiaries of the ACA due to the increased number of insured customers, but the HMOs will have less of a benefit since ACA policies dictate a lower profit margin.

Our Takeaways for the Week: 

• Net neutrality will not be solved for some time due to the legal challenges at play
• The current dispute of the ACA presents possible winners and losers in the healthcare sector

Disclosures

Negative Interest Rates: What Color is the Dress?

by Brad Houle, CFA Executive Vice President

In Europe there are now more than $4 trillion in bonds that have a negative yield, a number which is about 15 percent of the global bond market. The countries of Germany, Switzerland, Sweden, Finland and the Netherlands are all unfortunate members of this club for at least part of their respective yield curves. What this means is investors are paying a government such as Germany for the privilege of loaning them money. This is contrary to the concept of compound interest or the time value of money. In the investment profession we do not use the word "guarantee" as it can cause trouble with our chief compliance officer or possibly the SEC. However, with negative yielding bonds you are all but guaranteed to lose money except in the circumstance where the yield on the bond goes more negative. In this instance you can then sell the bond for more than you paid for it earning a small profit. This is a flimsy investment thesis at best.

Bond yields in Europe are negative for fear of falling inflation and the fact that the European Central Bank is purchasing large quantities of sovereign debt in an effort to hopefully stimulate the economy. All of this begs the question: who is buying these bonds with negative interest rates and why? Some bond managers are forced to buy negative yielding bonds due to flows of funds into the mutual funds they manage. For example, if the bond manager is managing an index fund that replicates the debt markets of countries experiencing negative yields and receives cash deposited in the fund, the manager is forced to invest in bonds in markets that are outlined in the prospectus of the fund. In addition, many investors are restricted to investing in very narrow slices of the bond market. Owning sovereign debt is important to banks due to regulatory capital requirements. This means that banks need to own high quality assets as part of their capital in order to makes loans to customers. For instance, it’s likely that a bank in Germany will need to own negative yielding German government bonds as capital.

The long-term implications of negative yields are unknown. This phenomenon has been exceedingly rare in history and has never been this widespread. We have received questions from clients as to the chances of this happening in the United States. Short-term treasury bills did go negative for a time during the financial crisis in 2008; however, we do not believe that we will see negative interest rates in the United States anytime soon. While it is possible, the U.S. has inflation of 1.6 percent, as measured by the Consumer Price Index last month, and the U.S. also has GDP growth of 2.2 percent. These facts would suggest higher interest rates as opposed to negative interest rates.

 Our Takeaways for the Week:

• Risks of negative interest rates in the United States are low. Our economy is growing as evidenced by consumer spending in the United States. Household consumption grew by 4.2 percent year-over-year in the fourth quarter of 2014. Consumer spending, which comprises 70 percent of the economy, has been robust due to a strong labor market and falling gas prices

Disclosures

Take Your Time

by Ralph Cole, CFA Executive Vice President of Research

Take Your Time

Greece and Euro Area finance ministers reached a tentative agreement Friday to buy time for Greece to get their financial house in order. The EU has agreed to provide liquidity for up to four additional months if Greece provides a sufficient list of measures they are willing to undertake.¹

Greece will have a primary budget surplus in 2015 which means they will have a budget surplus - if you don’t count debt payments. While this may seem unrealistic, it does mean the Greek government could continue to operate if they stop paying their creditors. However, this would not be in the best interest of anyone. Greek bonds would drop in value, as would some of the bonds of other peripheral countries. This situation is known as financial contagion. Greece in and of itself is not a huge economy (it is approximately the size of Indiana), but the world is trying to judge the effectiveness the European Union. Can they hold it together?

We believe that the EU can indeed keep it together in the near-term. In the future, it may be in the best interest of some countries, Greece as one example, to move out of the Eurozone. If a country finds itself politically unable to work within the confines of the European Union, they may want to exit the agreement in order to control their own budgets and currency. The EU would rather have this happen during a time of strength, rather than at a time of ongoing economic stress.

Waiting on a Friend (Fed)

The Federal Reserve board meeting minutes were released Wednesday and markets deemed them to be dovish; meaning that the Fed is afraid of raising rates too soon and choking off a fragile recovery. The surprise to us is that people continue to refer to this as a recovery. Both U.S. GDP and the S&P 500 are at all-time highs and the U.S. passed through recovery territory years ago. While nothing is a foregone conclusion, we believe the Fed will raise rates later this year. There will be a lot of hand wringing over the first Fed rate hike (there always is), but we believe the economy is on very sound footing and can handle higher rates. While it could happen in June, it will most likely happen in the second half of the year. This topic will be discussed ad nauseam throughout the year, but we view tightening as a positive. A rate hike will be a signal to the markets that the financial crisis is officially behind us and extraordinary measures of liquidity are no longer needed.

Takeaways for the Week:

• The Greek debt story is not over, but they do have more time
• We expect the Fed to raise rates later this year

¹ Source: Bloomberg

Disclosures

S&P: 500 Shades of Profit

by Shawn Narancich, CFAExecutive Vice President of Research

S&P: 500 Shades of Profit

Blue-chip U.S. stocks are again in record territory, reminding investors of the powerful backdrop that near-universal easy money policy has in keeping the capital markets liquid. The start to 2015 shares parallels with the same period last year, when growth worries precipitated by a severe winter domestically and concerns about Fed tapering gave way to a better economy in the second half of the year. This time around, a seemingly intractable conflict in eastern Ukraine, our next installment of the Greek funding drama and fears of the effects of a strong dollar on fourth quarter profits combined to put a chill in markets to begin the year. But once again, stocks have climbed the proverbial wall of worry as fourth quarter profits have come in better than expected, a new truce in eastern Ukraine between government forces and Russian sponsored rebels was reached, and the new leaders of Greece practice the well-worn art of brinksmanship. The result for fixed income investors is reduced returns as benchmark Treasuries have lost some of their flight-to-safety bid.

Ringing the Cash Register?

With gasoline prices having plunged to the $2.00-per-gallon level, investors could be forgiven for expecting a better retail sales report than that which was delivered for January. Lower gas prices have freed up well over $100 billion of disposable income for the U.S. consumer, so why have retail sales declined for two consecutive months? Clearly, the math of lower fuel prices dampens the headline number, but the expectation is that savings at the pump will be spent elsewhere. Some of the explanation appears to reside in historical data showing that consumers don’t immediately spend windfalls from sources such as tax rebates and savings at the pump and, in deference to the latter, our opinion is that low energy costs will prove to be fleeting. Notwithstanding our skepticism about today’s low price of oil, we would observe that the U.S. consumer is in great shape, benefitting from faster job growth, benign inflation overall and the wealth effect from higher home prices and values of investment portfolios. So despite weakness in the past couple retail sales reports, we believe it’s premature to give up on the U.S. consumer. In fact, we believe consumption expenditures will lead the economy to new record highs in 2015.

Glimmers of Hope in Europe

Despite being disadvantaged by rigid labor laws that prevent free hiring and firing and excessively high tax rates the Continent’s sluggish economy picked up ever so slightly in the final quarter of last year. While a 1.4 percent growth rate is nothing to write home about, it beats recession. It also acknowledges the salving impact of low European interest rates and fuel costs, a dramatically weaker euro that has stimulated export, and tentative labor market reforms in Spain that have begun to have their intended effect. Meanwhile, Germany remains Europe’s economic engine and primary beneficiary of the weaker currency. European investors cheered the economic news and positive developments on the geopolitical front by bidding blue-chip shares there to new 7-year highs.

As the sun begins to set on another earnings season, we feel reasonably good about the results that have been delivered. For the most part, U.S. companies have done a solid job offsetting strong dollar headwinds with continued efficiency gains and additional sales from a relatively healthy U.S. economy.

Our Takeaways from the Week

•  As another decent earnings season begins to wind down, U.S. stocks are back at record highs
•  Disappointing retail sales in January are likely to give way to healthier gains ahead

Disclosures

Liquid Courage

by Jason Norris, CFA Executive Vice President of Research

Volatility increased this past week in most asset classes with oil being in focus. In the last two weeks, crude oil is up roughly 20 percent, its best two-week move in 17 years. While the demand picture has not changed, we have seen U.S. oil and gas companies announce major employment cuts and capital expenditure reductions for 2015. We believe that there has been some “short covering” in the market which has led to recent strength. Our belief is that by year-end, oil prices will be between to $60-$70/barrel, due to reduced supply in the U.S. In the face of this, we do believe we see some opportunity in energy stocks. While earnings continue to come down, we think we can find value in select names with strong balance sheets.

All Over the Road

As mentioned earlier, the energy complex was not the only asset class exhibiting volatility. In the first five weeks of 2015, the S&P 500 has been either up or down more than 1 percent 11 times, which is 44 percent of the trading days. To put it in perspective, last year the S&P 500 moved this much only 15 percent of the time. The chart below highlights the last five years.

Days the S&P 500 Was Up or Down More Than 1 Percent

	2011	2012	2013	2014	2015
Number of Days	96	50	38	38	11
Percent of total trading days	38%	20%	15%	15%	44%

Source: FactSet

This year is setting up to be similar to 2011, a year that  saw a lot of uncertainty due to surprisingly poor U.S. GDP growth, a U.S. debt downgrade and the European crisis coming to the forefront. All this uncertainty resulted in a flat market for 2011, but it was a rollercoaster ride. We believe the fundamentals of the U.S. economy and the recent actions of the European Central Bank leave the foundation of the global economy a little firmer. We don’t think the volatility mitigates itself; however, we do believe that equity returns will be better than 2011.

Working for the Weekend

Heading into a wet weekend on the west coast, the monthly jobs report this morning was very strong with the U.S. economy adding 257,000 jobs in January. The unemployment rate ticked up to 5.7 percent due to an increase in people looking for jobs, which is a positive for the economy. This is only a small part of the story. Job gains for December and November were revised higher by 147,000. The third leg of the stool of the January jobs report was an uptick in wages. Wages bounced back after a disappointing December, rising 0.5 percent month-over-month. With a strong labor market and unemployment close to the Fed’s target, we believe this wage growth will persist throughout 2015. This further reinforces our view that 2015 will be a good year for “Main Street.”

Our Takeaways for the Week: 

• Main Street will fare better than Wall Street in 2015
• Adding to high quality energy names at this time could pay dividends in 2015

Disclosures

Federal Reserve Bank Basics

by Brad Houle, CFA Executive Vice President

As investors we follow what the Federal Reserve does with a level of geeky interest generally only seen at a Star Trek convention. As a result, the Federal Reserve is a point of interest in our client communications and Outlook presentations. We thought it would be helpful to take a step back and discuss what the Federal Reserve is and what it actually does.

The Federal Reserve is the government’s bank as well as a bank to the bankers. The Federal Reserve has a dual mandate: to provide price stability and full employment. Maintaining price stability is simply not allowing inflation to be too high or too low. Presently, inflation – as measured by the Consumer Price Index (CPI) – is running at about 1.6 percent per year. This is well below the 2 percent target set by the Federal Reserve. The CPI is a basket of goods that includes expenses such as rent, consumer electronics and food. To arrive at the monthly CPI, researchers actually visit stores to price items that go into the calculation that measures inflation.

Too much inflation is a bad thing for an economy because it diminishes the purchasing power of money. Wages often don't adjust upward as quickly as fast-moving inflation, which can cause a decline in standards of living. Hyperinflation occurred in Germany in the early 1920s where the cost of living increased fifteen-fold in six months.

Too little inflation can also be damaging to an economy and ultimately impact the standard of living of consumers. Deflation occurs when prices are dropping which can become a negative feedback loop that triggers economic malaise. As prices drop, consumers delay purchases in hopes of better pricing, which causes the impacted economy's growth to slow. Japan has suffered from deflation for more than a decade. Their central bank is now trying to break the cycle by stimulating Japan's economy in an attempt to resume growth.

The benefits of providing as much employment as possible are fairly simple. Employed citizens pay taxes and have a tendency to buy things, which drives economic growth. The question then becomes … What is the maximum level of employment? Currently, the Federal Reserve considers 5.4 percent to be full employment. Unemployment will never be zero because there is a segment of the working-age population (from 16 to 65) that is unable to work or unwilling to work. This level of full employment varies among different countries. In some European countries full employment is a high-single-digit number and is often a function of the opportunity cost of not working.

How does the Federal Reserve affect change in the economy to meet its dual mandate? This is where the concept of the Federal Reserve gets fairly abstract. The Federal Reserve can raise or lower short-term interest rates to effectively stimulate the economy if it is growing too slowly or "tap the brakes" if the economy is growing too quickly. This link for a video, although a bit dated, does a good job of explaining the nuance of how the Federal Reserve operates.

http://content.time.com/time/video/player/0,32068,57544286001_1948059,00.html

 Our Takeaways for the Week:

•  We are early in earnings season for the fourth quarter of 2014 and it has been a mixed bag so far. Multinational companies are starting to show the impact of a strong dollar
• This is negatively impacting sales in some cases as a stronger dollar makes goods exported from the United States more expense to consumers in other countries

Disclosures

Friends in Low Places

by Ralph Cole, CFA Executive Vice President of Research

In a much anticipated move, the ECB joined the rest of the developed world by announcing a comprehensive quantitative easing package this week. Investors were worried that maybe the plan would not be big enough or long enough to satisfy global capital markets. Bond yields and equity indices gyrated as the official announcement was released but eventually stocks moved higher and European bond yields moved lower. Yields on 10-year bonds around the world remain shockingly low, and it appears they may remain low for some time. Here is a list of global 10-year yields:

U.S.	1.88%
UK	1.51%
Canada	1.42%
France	0.61%
Germany	0.38%
Italy	1.54%
Spain	1.41%
Switzerland	-0.20%

Source: Factset

The goal of quantitative easing is to lower longer-term borrowing costs in an attempt to incentivize businesses and individuals to borrow money and invest. Some of the excess liquidity in the system can also flow to equity markets, and drive prices higher. This acts to boost confidence and hopefully trigger investment and spending. This recipe worked well in the U.S. during QE3, and Europe is hoping to follow the same path.

Golden Years

Golden months may be a better term. Somewhat under the radar, gold has turned up in a strong performance in the last three months. It appears that a race to the bottom in currencies is finally starting to resonate with global investors. Gold is up 15 percent from recent lows to nearly $1,300 per ounce. Gold is viewed as a hard currency that can't be debased like fiat currencies. When we held gold in client portfolios several years ago it was for this very reason.

Takeaways for the week

• Despite a well telegraphed move, the QE announcement by Mario Draghi was celebrated by markets around the world
• Many developed economies are attempting to deflate their currencies in an effort to boost growth. This has led some investors to purchase gold as a store of value

Disclosures

New Year, New Worries

by Shawn Narancich, CFAExecutive Vice President of Research

Deja Vu

Much like January of last year, U.S. stocks are off to a rocky start in the New Year, thanks to a European economy on the verge of stall speed and a plummeting price of oil that’s making investors feel like something other than a small surplus of excess production is afoot. Even after the recent volatility, blue chip stock prices have still tripled since their lows exiting the financial crisis in 2009 and have outperformed international stocks by a whopping 70 percent over the past five years. The question on everyone’s mind is whether a U.S. economy, having now wrapped up what we expect to have been its third consecutive quarter of 3 percent or better growth, can continue to decouple from troubled economies abroad. We still believe that will be the case, as Americans benefit from lower energy prices and a much healthier job market, but positive equity returns in 2015 aren’t likely to come as easily as they did last year.

Banking on Profits?

Our expectation is for U.S. profits to grow by mid-to-high single digit rates in 2015 but, at least for the final quarter of last year, Wall Street expectations are much more subdued. As the fourth quarter earnings season kicks off, investors are expecting earnings to have grown at just a 1 percent clip, reflecting plunging oil prices that will assuredly dent the profits of big oil companies like Chevron and Exxon. What Wall Street may be missing is the positive impact of low oil and natural gas prices on 90 percent of the market’s constituents that are net users of oil and natural gas. While earnings for multi-national companies are likely to be dampened by the stronger U.S. dollar, a clear plurality of publicly traded companies will benefit from lower energy costs that should help boost profit margins.

Regardless of your persuasion, few will argue about the decidedly poor results that banks delivered this week as JP Morgan, Bank of America, Wells Fargo, and Citigroup reported earnings that collectively fell by 12 percent in the period. Unfortunately for investors, the numbers came up short of expectations in all but one case (Wells Fargo), prompting sell-offs in all four names. While lending volumes have picked up in recent quarters, net interest margins are under pressure as deposit costs remain near zero and new loans are underwritten at increasingly low rates. JP Morgan demonstrated that legal costs related to the housing crash remain a meaningful expense item years after the fact, while each of the investment banks reported disappointing results from fixed income, commodities, and currency trading. As reporting season transitions to a broader swath of companies next week, we expect to see more encouraging results.

Off Target

In a move only mildly surprising to those who have followed its travails in Canada, Target announced this week that it will be exiting the country just two years after its first store opening up north. Having never made a penny there, the general merchandiser’s new CEO Brian Cornell has pulled the plug, acknowledging that management couldn’t foresee profits before 2020. The result of Target’s Canadian misadventures? Nearly $6 billion of accumulated losses and write-downs, equivalent to more than the company’s entire profitability for the past two years combined. Yes, this is what gets CEO’s fired, and is a key reason why prior leader Gregg Steinhafel showed himself to the door early last year.

Our Takeaways from the Week

• Lower stock prices in the New Year reflect worries about flagging growth internationally and dislocations in key foreign currencies

• Fourth quarter earnings season is off to an inauspicious start thanks to disappointing results at four major banks

Disclosures

Oregon Business Magazine Names Ferguson Wellman a Top Financial Planner/Money Manager in its 2015 Power Book

PORTLAND, Ore. – January 12, 2015 – 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 third in the state on their list of 41 financial planning companies. The listing was created by calculating the total number of assets under management in Oregon.

“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.

Ferguson Wellman Capital Management builds and manages customized investment portfolios of $3 million or more for individuals, families, foundations, endowments and corporate retirement plans. With a majority of the investment portfolios comprising individual securities, Ferguson Wellman’s team of in-house analysts make decisions regarding asset allocation, sector weights and security selection directly for our clients.

Founded in 1975, Ferguson Wellman is a privately owned registered investment advisor headquartered in the Pacific Northwest. With more than 706 clients in 36 states, the firm manages $4.1 billion. Ferguson Wellman also serves individuals and institutions through West Bearing Investments, a division that manages portfolios with investments of $750,000 or more. (data as of 12/31/15)

The January Effect

by Jason Norris, CFA Executive Vice President of Research

The January Effect

Historically, investors have cited the so-called January indicator in an attempt to forecast future returns. If the S&P 500 is positive in the first five trading days of January, then 75 percent of the time, stocks have enjoyed a positive return for that entire calendar year. With stocks seeking a positive gain the first five days of 2015, we can be hopeful for more of the same come December. With stocks delivering gains two-thirds of the time anyway, this looks to be only modestly significant. While we don't make investment calls based on calendar events and historically superstitions, we at least recognize when the odds are in our favor. As a footnote, the S&P 500 was down the first five days in 2014, and yet we ended the year with positive gains.

Don’t Chase the Hot Dot

Jack Bogle is on cloud nine. The biggest proponent of passive investment management, and founder of The Vanguard Group, saw over $200 billion of inflows from investors in 2014 as frustration increased with active management. In 2014, depending on asset class, 75-90 percent of active equity managers trailed their benchmark. While this lack of alpha is a concern, it is not the most important contribution to an investor’s overall return. The biggest factor is the allocation between stocks and bonds, and then which equities you favor (large cap, small cap, international, ETF, etc.) The U.S. large cap space was the best game in 2014, and the more exposure the better for investors. Finally, there will be periods where passive does better than active; however, over longer periods of time, active is superior. Over the past five years, 50 percent of institutional active managers have outperformed. Over the past 10 years, 75 percent of active managers have outperformed.* The key for investors is patience. Chasing last year’s performance has never been the best policy and taking a long-term view is the best approach.

Our Takeaways for the Week: 

• 2015 should be a positive year for stocks, though it likely will be volatile
• Over the long-term, active management beats passive

*Source: Mentor

Disclosures

2015 Investment Outlook Video: Riding the Global Liquidity Peloton

We are pleased to present our 2015 Investment Outlook video titled, "Riding the Global Liquidity Peloton." Ralph Cole, CFA, executive vice president of research and Investment Policy Committee member, discusses what we believe will occur in the markets in 2015.

To view this 12-minute video, please click here or on the image below.

Intro slide

A Glimpse Into the Continuing Greek Crisis

by Brad Houle, CFA Executive Vice President

Greece, often referred to as “the cradle of democracy,” practices a rather messy form of government by the people. Recently, a presidential election in Greece was considered to be unsuccessful due to a lack of a majority vote in the third round of voting. Due to this failed election, the Greek Parliament needs to be dissolved and general elections need to be held. This matters because the composition of the new government is most likely going to be the Syriza Party (according to the polls). The Syriza Party is considered to be extremely left-wing and is known to be very anti-austerity and anti-European Union.

This government turmoil in Greece has caused the Athens Stock Exchange to decline by over 20 percent in the month of December. Additionally, the Greek government bond market has had a vicious sell-off, much akin to the 2010-2012 European Debt Crisis. The Greek 10-year government bond is yielding 9.3 percent, up from 5.5 percent in early September. By contrast, the Japanese can borrow money for 10 years for .30 percent and the United States 10-year bond is at 2.17 percent.

What is driving down Greek bond prices and spiking yields is the fear that if the Syriza party comes into power, they may try to renegotiate the terms of the recent bailout of the Greek government. If this negotiation does not go their way, it is possible that Greece could leave the European Union. This creates uncertainty of how the bondholders of Greek debt would be treated in this circumstance

The good news about this crisis is that it is contained in Greece. The debt of other European countries such as Italy and Spain have not been impacted. The “do-whatever-it-takes” backstop that was created by Mario Dragi and the European Central Bank has been enough to keep a debt crisis contagion from occurring. General elections in Greece are scheduled for January 25 and even if the Syriza party does come into power, their ability to reverse austerity measures and renegotiate bailout terms is uncertain.

Our Takeaways for the Week:

• Unfulfilled campaign promises are a universal feature of every form of democracy. It is highly probable that even if the Syriza Party comes into power they won’t be able to make the proposed changes.
• We wish you and your family a very happy New Year.

Disclosures

Financial Planning Magazine Names Ferguson Wellman Capital Management on Top Registered Investment Advisers List

PORTLAND, Ore. – January 1, 2015 – Ferguson Wellman Capital Management was recently informed that the firm was named by Financial Planning to their “Top 100 Registered Investment Advisers Firms” list as well as their “50 Fastest Growing RIA Firms.” The Financial Planning list has strict requirements, with the editors of the rankings excluding firms with broker-dealer and insurance company affiliations, as well as and large outside owners. This year they aimed to remove firms that sell commission-generating investments, such as annuities. The only companies on the list are organizations that provide true wealth management to more than 50 percent of their individual client base. The rankings were compiled with data from Form ADV filings as of September 24, 2014.

“Everyone at Ferguson Wellman is very gratified by our recent acknowledgement in Financial Planning. 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 700 clients with assets starting at $3 million. The firm works with individuals and institutions in 36 states with a concentration of those clients in the West. Ferguson Wellman manages $4.1 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 12/31/14 data.

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Methodology and Disclosure: Rankings compiled by data from Form ADV filings as of September 2014, less broker-dealer and insurance company affiliated advisers.

You Better Believe It

by Jason Norris, CFA Executive Vice President of Research

You Better Believe It

This holiday week equities continued their historic seasonal trend of strength in December. Driven by positive economic data in the U.S, although many investors had started 2014 with a lot skepticism regarding the durability of the U.S. economy, we are now getting confirmation as to just how healthy it really is. For example, this past Tuesday brought an impressive GDP revision of 1.1 percent to 5 percent. This solid upgrade was driven primarily by consumer spending. This data resulted in a post-winter vortex snap back of 4.8 percent over the last six months. While this may be above expected trend for 2015, it does highlight the underlying stability in the U.S. economy. Wednesday’s unemployment claims confirmed such vitality with only 280,000 people filing for initial jobless benefits (a number under 300,000 is considered healthy). The recovery we have seen in jobs in 2014 is the best we have seen in over a decade. Case in point, through November, the U.S. has added 2.65 million new jobs, which is the best annual job growth since 1999. Lower gas prices and higher consumer confidence provides a tailwind into 2015 which keeps us bullish on the U.S. economy, and more specifically, the U.S. consumer.

Somebody Get Me a Doctor

This most recent data may have put a scare in some of the defensive sectors, specifically healthcare. The sector was hit hard on Tuesday (down over 2 percent) as investors liquidated positions from biotech to pharma. Healthcare has been a popular overweight this year and investors have benefitted with a 25 percent total return year-to-date. However, a shift to more cyclical sectors of the economy (technology, oil and materials, for example) may be a headwind. Investors were also concerned about a recent deal between Express Scripts (a large pharmacy benefits manager) and Abbvie (a pharmaceutical research and development company) regarding their recently-launched Hepatitis C drug. Throughout most of 2014, Gilead Sciences had a virtual monopoly on a Hep C cure; however, the treatment was pretty pricey. Abbvie launched their competitive drug on Friday, December 20, which didn’t bring much fanfare. However, over the weekend they signed a deal with Express Scripts to be the sole regimen for two-thirds of Hep C cases. Speculation is that Abbvie was pretty aggressive on discounting. Investors initially took Gilead to the “woodshed.” However, they followed through with broad selling over concerns of future pricing pressure for all drugs and devices. While Gilead garners close to 50 percent of the revenues from Hep C treatments, Abbvie is estimated to only have 10 percent. Therefore, while it is a great complement to their portfolio, the company has a solid pipeline of novel drugs as well.

Spirit of the Season

Here’s hoping for a bountiful holiday season and if the equity returns stay true to their seasonal trends, we should finish with a strong December and hopefully hold the 18,000 mark on the Dow. Fun fact: since 1987, the month of December has posted the highest monthly returns for the entire year.

Happy Holidays to you and yours from all of us at Ferguson Wellman and West Bearing.

Our Takeaways for the Week: 

• True to recent market history, December is shaping up to be a good month for equities
• The U.S. economy is ending the year on solid footing

Disclosures

Here Comes Santa Claus

by Ralph Cole, CFA Executive Vice President of Research

The Federal Reserve delivered some early Christmas cheer with a new policy statement on Wednesday, and by Thursday afternoon the Dow average had advanced 700 points. Please excuse us for being frustrated by the constant attention to the Fed and the parsing of every statement they utter. This tends to happen during any Fed tightening cycle. The chart below shows the average S&P 500 performance around the last five Fed tightening cycles. As you can see, about six months before the Fed starts raising rates the market goes through a correction of 5–7 percent and volatility rises.

The U.S. economy continues to hum along, and there is no lack of positive economic indicators. We believe that the Fed will be raising short-term interest rates in the middle of next year and they are doing their best to signal that move to the markets well in advance. The most recent examples last week were jobless claims, which dropped to a six-week low, consumer comfort climbing to a seven-year high, leading economic indicators rising an additional .6 percent and retail sales increasing by the most they have in eight months. In short, there is plenty of good economic news to go around, and enough momentum for the Fed to justify raising rates next year.

Wind of Change

While oil prices fell modestly this week, energy stocks began to rally. Since the peak in oil prices in June, the S&P energy sector fell 25 percent. This week oil prices are down another 2 percent, but oil stocks in the S&P were up 7 percent. We can’t say that we are surprised. Whenever you get such a dramatic drop in prices, it tends to produce bargains. Financial buyers aren’t necessarily brave enough to step into these situations, but strategic buyers are. This week Repsol, a Spanish oil company, made an offer to buy Talisman Energy for $12.9 billion. Talisman’s share price was as low as $3.96 on December 8, and now trades for just over $9.00 per share. We made the case last week that the sell-off in oil was overdone, and it appears others are coming to the same conclusion.

Our Takeaways from the Week

• The stock market will continue to experience increased volatility in the coming months as the Fed communicates its tightening plans
• The sell-off in oil stocks is overdone, and there is value in the sector
• Our warmest wishes for a happy holiday season!

Disclosures

Black Gold?

by Shawn Narancich, CFAExecutive Vice President of Research

Decoupling

With the holiday season in full swing and U.S. investors rejoicing about another year of solid U.S. equity returns, most international investors may be forgiven for feeling like they are getting a lump of coal in their Christmas stocking. In an increasingly decoupled global economy, where China’s growth is slowing and Europe and Japan teeter on the brink of recession, 11 percent returns domestically reflect, in part, the increasingly attractive growth profile of the U.S. economy. What’s surprising is the fact that China’s stock market has risen over 30 percent so far this year, helping buoy emerging market equity returns in a year where stocks have fallen in most foreign markets. Providing better investor access to mainland Chinese equity markets (through linking the Hong Kong and Chinese markets) has helped stimulate investor demand, but the flow of economic data out of the Red Giant remains rather discouraging. Slowing industrial production growth, weaker retail sales, and moribund manufacturing activity all speak to the challenges that Chinese policy makers confront in transitioning the world’s second largest economy from an investment led juggernaut to one better balanced by consumption.

Leading the Way

In contrast, the U.S. economy is moving full speed ahead. The November retail sales growth that came in at the high end of estimates reaffirms our thesis of a healthier U.S. consumer boosted by healthy job gains, rising home prices and the falling price of oil. Healthy retail sales data bely the 11 percent sales decline over the long Thanksgiving Day weekend, indicating that the weak sales numbers were more a function of an earlier start to the holiday selling season. With government spending having apparently bottomed and capital spending on the rise, the error of estimates for Q4 GDP is once again higher.

Crude Thoughts

All of which brings us to the topic that seems to be on everyone’s mind nowadays – oil. Now down 46 percent since June, U.S. black gold is far from it at the moment. Yet we continue to believe that the fundamentals of oil aren’t as bad as the price implies. Developed economy inventories are near five-year averages, global demand continues to grow and, most importantly, because of oil’s correlation with economic growth, GDP globally continues to expand in a world of accommodative monetary policy. Contrast today’s environment with 2008, when oil plummeted over 70 percent in eight months, a washout that coincided with consumer price shocks from $4.40/gallon gas and a global economy on the verge of collapse. The best cure for low oil prices is low oil prices, and at today’s level of around $60/barrel, we expect global petroleum exploration and development spending to fall by 25 percent or more in 2015, sowing the seeds for tighter markets and higher prices.

Indeed, evidence of the supply response to come is already upon us. Lower prices are reducing oil companies’ cash flow, leaving them with less money to reinvest in new wells. We are just beginning to see U.S. shale producers announce their 2015 capital budgets and, so far, the anecdotes support our contention that investment levels will drop dramatically. Indeed, November’s new U.S. well permits number, down 45 percent sequentially, offers investors a taste of the supply response to come. Conoco has announced a 20 percent drop in its capital spending and small independent producer Oasis is cutting its 2015 cap ex budget by 44 percent. Dozens of other independent U.S. producers, those responsible for the domestic energy boom of recent years and which are largely responsible for doubling U.S. production over the past six years, will come to the confessional between now and the end of January.

With less money being expended to replenish reserves from shale wells that deplete up to 50 percent of recoverable reserves in the first two years of production, we expect the oil markets to tighten faster than investors currently believe. We would observe that the incremental U.S. liftings that have driven production growth globally are of much shorter duration than the marginal production of 2008 from the Gulf of Mexico. Deepwater projects can take 5-10 years to produce first oil and, when it finally comes, wells under extreme pressure miles below the seafloor produce at persistently high flow rates for project lives that can last up to 30 years. The point is that supply elasticity is likely to bite much faster this time around and, even with the production backdrop pre-shale, low prices didn’t last for long in 2009. So in this festive season, be thankful for the boost to disposable income that today’s low oil prices provide, but don’t expect them to last.

Our Takeaways from the Week

• The U.S. continues to demonstrate its global economic leadership as blue chip stocks prepare to close out another good year
• $60 oil prices provides a meaningful boost to U.S. consumers, but low prices are likely to prove fleeting

Disclosures