Never Can Say Goodbye

by Ralph Cole, CFAExecutive Vice President of Research

Never Can Say Goodbye

Market volatility has historically increased before and around Fed tightenings and 2015 is apparently no exception. The Federal Reserve has now held short-term interest rates at essentially 0 percent for nearly 7 years. This policy was deemed necessary to faster recovery from the Great Recession, the biggest financial crisis since the Great Depression. The good news is that the medicine has worked and the “patient”, the U.S. economy, has been out of intensive care for a number of years.

While the U.S. economy is doing fine to varying degrees, the rest of the world appears to be struggling, especially emerging markets. Higher U.S. interest rates will hurt countries that have dollar denominated debt. Slow growth and heavy debt loads have sent emerging market stocks plunging to 5 year lows. Furthermore, if an economy outside of the U.S. has debt that is denominated in U.S. dollars, a stronger dollar hampers their ability to pay back that debt.

All of these factors are now weighing on the Fed’s decision to embark on a tightening cycle. Many believe that a delay is in order because of recent market volatility. On the other hand, Fed governors have signaled that market volatility is not reason enough to delay. Today’s jobs report did not bring much clarity to the situation. Unemployment fell to a new cycle low of 5.1 percent, and jobs grew 173,000 in August. Revisions to the prior 2 months employment growth added another 44,000 jobs than previously estimated. The market sold off today because those numbers might be strong enough to justify tightening in September. The jury is still out on these decisions and we will simply have to wait and see what the data dependent Fed decides when they meet in two weeks. We continue to believe that modestly higher rates would be a “good” thing and are confident that the U.S. economy can handle slightly higher interest rates in the coming year.

Our Takeaways for the Week

• Market volatility always accompanies the onset of a Fed tightening cycle
• Despite higher rates, the U.S. economy and stock market can continue to prosper

Disclosures

A Light in the Black

by Jason Norris, CFAExecutive Vice President of Research

A Light in the Black

What a week! With concerns about growth in China, continued deterioration of the Chinese equity market and U.S. investors rushed to the sidelines by redeeming over $17 billion in equity mutual funds and ETFs. This, coupled with concern over when the Fed will raise rates, led U.S. equities to experience a 12 percent correction from recent highs on Tuesday (see last week’s blog for more detail). This was long overdue as it had been almost four years since the S&P 500 had corrected by at least 10 percent, which was the third longest period in history. However, after six consecutive days of selling, on Wednesday the near-term bottom was reached on the S&P at 1867, down from its all-time high of 2130 which was reached on May 21, 2015.

Understandably, rapid downward moves in equities can be disconcerting. We don’t know if we’ve seen the bottom; however, we believe there is a light at the end of this tunnel in the form of domestic market fundamentals. For example, U.S. GDP was revised higher on Thursday from 2.3 percent q/q annualized to 3.7 percent. This was driven by several factors - primarily capital spending and consumer spending. Earlier this month we also saw retail sales numbers revised higher. When this data was originally reported, we did view it with some skepticism since our bottoms-up analysis did show better strength than the broad government reports.

After analysis of the earnings reports for the companies we own, it revealed annual growth in earnings of 2 percent; however, excluding Energy, growth was close to 13 percent. Even when looking at the broad market, earnings growth (excluding Energy) was around 5 percent. This growth was driven by the U.S. consumer and healthcare. These fundamentals signal to us that the U.S. economy is healthy and improving.

Earnings Growth for the 10 Economic Sectors of the S&P 500

	Q2 y-o-y growth	2015e
Consumer Discretionary	9.2%	11.3%
Consumer Staples	2.5%	1.7%
Financials	6.8%	15.9%
Healthcare	14.4%	12.7%
Industrials	-4.5%	-1.0%
Info Tech	4.5%	4.9%
Basic Materials	6.0%	-1.0%
Telecom	8.5%	8.3%
Utilities	6.5%	1.6%
Total (ex. Energy)	5.3%	7.0%
Energy	-55.7%	-56.3%
Total	-0.7%	1.0%

Source: FactSet

The table above highlights the underlying sectors of the U.S. market, showing both the actual growth rate for the second quarter and an estimate for 2015. The key to focus on is that commodity prices are bringing down Energy and Basic Materials, and the strong U.S. dollar and China is hurting Industrials. However, when you lift up the hood of the market, corporate America is still exhibiting solid growth.

Our Takeaways for the Week

• Corporate earnings remain healthy
• While volatility may remain until the Fed tightens, we still like equities long-term

Disclosures

Narancich Quoted in Portland Business Journal

Oregon stocks stumble as market plunges

by Matthew Kish 

The stocks of 18 of Oregon's 20 biggest public companies dropped Monday as the stock market tumbled. The S&P 500, Dow Jones industrial average and the Nasdaq Composite each closed down nearly 4 percent.

Northwest Pipe Co. (NASDAQ: NWPX) and Lattice Semiconductor Corp. (NASDAQ: LSCC) were the only large Oregon stocks to post gains. Each ended the day up less than 1 percent.

While there's no consensus on the market stumble, local analysts pointed to weakness in the Chinese economy and uncertainty about central banks and interest rates.

"I would venture to guess it’s more people being skittish about the direction of the Fed right now," said Chris Abbruzzese, chief investment officer for Portland's Rain Capital Management. "The Federal Reserve is going to be less supportive of equities markets going forward.”

They also said the market was due to hit a speed bump.

"The markets had been unusually stable and had come up quite a bit over the past three years," said Kraig Kerr, a senior vice president and financial adviser at D.A. Davidson in Portland. "So most people were expecting a correction at some point and were surprised it hadn’t happened earlier."

Shawn Narancich, executive vice president of equity research and portfolio management at Ferguson Wellman Capital Management, said the firm doesn't see anything "sinister" happening.

"Our mantra continues to be keep calm and carry on," Narancich said.

Ferguson Wellman expects the U.S. economy to continue growing in the second half. The economy is adding jobs and inflation is low. Consumer spending, which accounts for roughly 66 percent of the economy, remains strong.

"Gas prices are going to start dropping," he said. "Unemployment is low. Disposable incomes are up."

Rain Capital’s Abbruzzese said there’s also “quite a bit of evidence” that “we’re due, if not overdue,” for a resurgence in spending on capital projects that would stimulate the economy.

Kerr said D.A. Davidson's advice for clients depends on circumstances.

"Clients that are going to need cash in the near term may want to consider locking in gains," he said. "For the most part if a client has a well balanced portfolio we're not doing anything."

Abbruzzese said Monday's market volatility highlights the need for investment strategies that minimize risk.

“This is the type of market where we really thrive,” he said. “The approach thrives because we are more mindful of risk factors in portfolio construction.”

Here's a look at how Oregon's biggest stocks fared:

Nike Inc. (NYSE: NKE) — down 2.81 percent to $103.87

Precision Castparts Corp. (NYSE: PCP) — down 1.95 percent to $228.85

Lithia Motors Inc. (NYSE: LAD) — down 2.82 percent to $101.89

StanCorp Financial Group Inc. (NYSE: SFG) — down 0.85 percent to $112.59

Schnitzel Steel Industries Inc. (NASDAQ: SCHN) — down 2.66 percent to $16.10.

Keep Calm and Carry On

by Shawn Narancich, CFAExecutive Vice President of Research

Feeling Violated

Worries about competitive currency devaluations emanating from China’s small haircut to the yuan last week were supplanted this week by manufacturing related fears that the world’s second largest economy could be experiencing a hard landing. The result was a tough week for equity investors, as European stocks entered correction territory and U.S. stocks fell five percent.

Timing is Everything

As the sell-off accelerated into today’s close, we couldn’t help but wonder what market soothing policy moves the Chinese might institute next, nor could we ignore the palpable sense that the Fed’s lift-off from zero interest rate policy just got delayed again. Volatility in stocks will register with Yellen & Co. as they attempt to time this cycle’s first interest rate hike. However, more impactful will be the continued deflation in commodities that threatens to leave the price level far from the Fed’s stated goal of two percent inflation. As oil seeks out new cyclical lows and Treasuries benefit from a flight-to-quality bid, the trade-weighted dollar actually declined today. At a time of increased economic and market turmoil overseas, this hints of US monetary policy remaining easier for longer.

Reasons For Optimism

Low fuel prices and an increasingly healthy job market are combining to boost the collective spending power of U.S. consumers, helping drive the economy to what we believe will be a stronger second half of the year. Notwithstanding this week’s pullback in stocks, we look forward to a better second half of the year for corporate America, which should benefit from easier foreign currency comparisons and a turnaround in oil prices, two key factors that have helped keep earnings flat so far this year. As profit visibility improves, we expect stocks to make forward progress.

Ringin’ the Till

With all but a small number of companies having now reported, the sun is setting on a second quarter earnings season characterized again by companies under promising and over delivering. Retailers book-ended Q2 numbers this week by reporting a decidedly mixed bag of results. While America’s largest retailer struggles to grow, Wal-Mart’s rival Target came through with earnings just strong enough to make investors believe that this beleaguered retailer has put the worst of its merchandising and credit breech struggles behind it. Standing out to the upside was Home Depot, which reported another impressive quarter of sales driven by higher house prices and rising home improvement spending. While closing down for the week amidst market turmoil, Home Depot’s stock outperformed the broader market as management once again raised its profit forecast for the year.

Our Takeaways from the Week

• A sell-off in global equities pierced the veil of U.S. market tranquility

• Retailers concluded second quarter earnings season by reporting mixed results

Disclosures

All the Beer in China

by Brad Houle, CFA Executive Vice President

Currency markets are extremely difficult to grasp and most people’s experience with foreign currency is limited to travel. These experiences generally involve moments where someone realizes they just paid roughly six dollars for a Diet Coke at the Eiffel Tower or that they can buy a substantial amount of beer for the equivalent of a dollar in China. This week the news that China had devalued its currency the renminbi or (RMB) by two percent was headline financial news and drove market volatility around the world. Two percent is not a lot of anything so why does this matter so much? On the surface, having a strong economy and a strong currency should be the goal of every country. However, in times of economic weakness central governments only have a few leavers to pull to stimulate economic growth.

One of the obvious and favorite methods is to stimulate economic growth to lower interest rates. This has been done in the United States since the financial crisis and numerous other governments around the world have used this play from the economic rescue playbook. One of the other techniques is to have a weak currency. Having a weaker currency gives a country a potentially large economic tailwind because it makes goods that are exported from the country with a weak currency relatively less expensive when exported to a country with a stronger country. To use a beer analogy, Tsingtao beer from China is normally 8 dollars a six pack at the supermarket and Stella Artois from Belgium is also around the same price. If China devalues its currency, the beer distributor can then buy Tsingtao for a discount because the U.S. dollar buys more Chinese RMB and therefore more Tsingtao. The relative price of the Tsingtao is now less than the Stella Artois and consumers will substitute the less expensive good for the more expensive good. It can be broken down to an ECON 101 scenario of supply and demand and consumer preference. If you then multiply this effect by a billions of dollars of exports from China or another country devaluing its currency it becomes impactful.

Officially, most countries profess to maintain a strong currency policy as that is often associated with a strong economy. Zhang Xiaohui, an assistant governor of the central bank of China, was quoted in The New York Times stating that the RMB is a strong currency and there was "no basis for the continued depreciation of the renminbi." The decision to depreciate the RMB was characterized by the Chinese government as a move to make the currency more market-oriented.

The fear by investors is that this is a sign that China is struggling to keep its economy growing. While China's last GDP growth number was 7 percent year-over-year, there have been worries about the Chinese economy slowing and that the actual growth rate was materially lower than what was “officially” reported. Data has been mixed relative to economic growth in China with worries about a property market bubble and economic indicators such as auto sales being very weak.

Our Takeaways for the Week

• Currency devaluation can be positively impactful to economic growth as it creates a tailwind for an export economy
• The signal that the markets took from the Chinese currency devaluation this week was that the growth in China is possibly weaker than the government was officially reporting

Disclosures

Narancich Quoted in Reuters

Investors eye gaming stocks beaten-down by China headwinds

by Ross Kerber 

Shares of U.S. gaming companies operating in Macau have tumbled on worries over China but some investors now see them as a buying opportunity, despite a slowing Chinese economy and volatile stock market.

Shares in Wynn Resorts Ltd have lost over half their value since last year and those of Las Vegas Sands Corp are down nearly 40 percent from their 2014 high. Beijing's currency devaluations have put further pressure on these companies which run gaming resorts on the Macau Peninsula across the Pearl River delta from Hong Kong.

Still, some influential investors think the stocks may be oversold.

"There are some beaten-down sectors in China now. I would go so far as to say that Macau gaming is an undervalued asset," said Mark Kiesel, chief investment officer for global credit for Pimco.

It owns debt in the sector, and Kiesel said he expects new infrastructure will bring more people to the resorts.

Also enthusiastic are the managers of Longleaf Partners Small-Cap Fund, advised by Southeastern Asset Management. In their most recent commentary the managers wrote that "Weakness in the Macau (China) gaming market provided the opportunity to purchase Wynn Resorts at a substantial discount to our appraisal." Southeastern is now the sixth-largest holder of Wynn.

Representatives for Wynn and Sands did not return messages. Wynn shares closed at $94.62 on Thursday, down from their high above $246 last year. Sands shares closed at $53.12 on Thursday, down from their high above $87 last year.

Skeptics still seem to outnumber the value-driven investors putting money into the stocks.

Shawn Narancich, executive vice president of equity research and portfolio management at Ferguson Wellman Capital Management, said his firm sold about 360,000 shares of Las Vegas Sands last year as they fell in value.

With several new resorts about to open in Macau he worries supply may outstrip demand, especially amid other headwinds like a Chinese anti-corruption campaign that has hurt gaming revenue in Macau, down 35 percent in July.

"It's hard for me as a money manager to make the case to return to the stock," Narancich said.

In commentary posted on July 27, managers of Wintergreen Fund wrote how they sold their holdings of Wynn Macau - majority owned by Wynn Resorts - in the first quarter of this year, citing weakening economics.

"Without a firm or improving business environment for gaming companies, it is very difficult for casino stocks to perform well," they wrote.

Portland Business Journal Writes About the Passing of Ferguson Wellman Co-Founder Norb Wellman

Ferguson Wellman co-founder dies at age 82

by Matthew Kish

Norb Wellman, who co-founded one of Oregon's most prominent wealth management firms, died Saturday from complications related to a stroke he suffered in 2013.

He was 82.

Wellman and Joe Ferguson co-founded the firm that became Ferguson WellmanCapital Management nearly 40 years ago. The firm has more than 715 clients and management $4.3 billion in assets.

"He displayed tremendous courage to start something from nothing in the late 1970s when he founded a firm that would ultimately become Ferguson Wellman," said CEO Jim Rudd, in a statement. "In a business that can become very emotional at times, no one can think of a time when Norb ever raised his voice. He was always the one who brought calm and level-headedness to every situation. He was so self-effacing — so concerned about our clients and the well-being of everyone in our company."

Wellman retired in 2004.

He remained involved with numerous organizations, including the Western Rivers Conservancy, Oregon State University Foundation and Oregon State athletics.

Wellman played collegiate baseball at Oregon State, leading the Beavers to an appearance in the 1952 College World Series. He held a bachelor's and master's degree from the university.

Wellman's family is establishing an OSU Baseball scholarship in his name. Contributions can be sent to the Oregon State University Foundation, 850 S.W. 35th Street, Corvallis, OR 97333. Contributions can also be made online.

Remembrances can also be made to Western Rivers Conservancy, for which Wellman served as a founding board member between 2002 and 2011. Contributions to WRC will honor Wellman and his efforts to further Oregonians’ connections with wild rivers, wild fish and wild places.

Good News First

by Jason Norris, CFAExecutive Vice President of Research

Good News First

The jobs market continues to chug along adding 215,000 jobs in the month of July with upward revisions to June and May of 14,000. While this is a solid pace of gains, it hasn’t been strong enough to push wages higher.

Equity markets, on the other hand, have struggled the last several sessions, despite favorable earnings reports. We have seen the major declines in profits in the energy sector; however, the rest of the economy seems to doing well. With just under 90 percent of companies in the S&P 500 reporting second quarter earnings, year-over-year profit growth could very well be negative 1 percent. While nothing to write home about, the main culprit has been the energy sector. Energy earnings are going to be down close to 60 percent year-over-year. If you back out the energy sector, earnings for the rest of the market will be up 5 percent year-over-year. Healthcare, consumer discretionary and financials have led the way higher. We recommend that investors don’t get caught up in the headline numbers, especially now that one sector is having such a major impact on the overall number.

The price of oil won’t necessarily be helping out the energy sector in the third quarter. With WTI at $44, it is close to its March lows. We moved to an overweight in the energy sector six months ago with the belief that as prices fell, demand would increase and supply would decline. What surprised us was the supply side. While rig count has declined by 60 percent domestically, U.S. supply has been somewhat slow to respond to reduced drilling activity. Nevertheless, U.S. supply has peaked and should decline into the second half of the year. We contrast the ex-growth situation domestically with OPEC, where key producers Saudi Arabia and Iraq have combined to boost cartel volumes by 6 percent so far this year. Aside from flattened production domestically and OPEC’s production growth this year, the key to our call for higher oil prices is stronger than commonly perceived demand growth and production from non-U.S., non-OPEC regions around the world. Despite oil prices that reached $140/barrel in 2008, this key source of global supply has failed to deliver any additional production over the past eight years. Our bet is that if additional volumes weren’t forthcoming in more propitious times, this key source of approximately 54 million barrels/day of supply is likely declining at currently depressed prices. Therefore, it will increasingly help to balance the market. We still believe oil will be closer to $70 then $40 at year-end and are focusing on companies with strong balance sheets to weather this near-term storm.

Only a Matter of Time        

Recent economic data has not been conducive to a September Fed rate hike. While the unemployment rate at 5.3 percent is a positive sign, coupled with weekly jobless claims at historic lows, there is still a lot of slack in the labor market. There are currently over 5 million jobs that are available, which is an all-time high. While this data signals a tight labor market, the unemployment rate figure does not. Also, wages aren’t increasing at a rate that is a threat to inflation. Earlier this week, the Employment Cost Index showed only a 2 percent increase in labor costs, which comprised 2.1 percent in wages and 1.8 percent in benefits. Today’s jobs report confirmed this with hourly wages rising only 2.1 percent.

We believe a Fed rate hike will happen before the end of the year. Given current data trends, whether it is September or December is a toss-up. We have seen and read about indications that the Fed wants to start the process; however, we believe the data is still signaling uncertainty.

Our Takeaways for the Week

• The Fed will raise rates by the end of 2015
• Stocks continue to be weak, which could be seasonal, but we believe that fundamentals are still attractive

Disclosures

Summertime Blues (and Yoo-hoos)

by Ralph Cole, CFA Executive Vice President of Research

Summertime Blues (and Yoo-hoos)

Earnings season is a whirlwind period of companies reporting their most recent quarterly results. We believe that this tends to be a better indicator of what is going on in the than most aggregate economic statistics. Large U.S. corporations touch virtually every corner of the world, and then report back to Wall Street every three months. This real time data has proven to be more reliable than government economic statistics. What do we mean by that?

Let’s take first quarter GDP, for example. When the Bureau of Economic Analysis first reported U.S. GDP growth for the first quarter it was +.2 percent. While not robust, it was at least positive. The next month they updated their estimate, and decided that the U.S. economy actually contracted .7 percent in the first quarter of the year. Then, last month the BEA updated their numbers again and came back with -.2 percent. U.S. GDP is destined to be revised for years to come. As investors we have to rely on what the companies are telling us in order to anticipate the direction of the global economy.

Thus far, what we have learned from second quarter earnings reporting is that the consumer is in good shape, but they are discerning amongst brands and retailers. The oil and gas slowdown is for real and it is hurting not only energy companies, but industrial companies that sell into that market as well. Banks, technology and healthcare have all seen relatively healthy growth here in the U.S.

Globally companies are citing re-acceleration in Europe despite the headlines in Greece. Weakness is evident in commodity-dependent countries such as Canada, Australia, Brazil and Russia. The materials sector has fallen on weak prices, which is especially troublesome for companies with heavy debt loads.

A number of companies and industries have executed very well in this challenging environment. For example, Amazon is starting to show some profitability along with continued growth. Regional banks are reporting strong loan growth and record low default rates. Biotechnology remains a source of strength for the market with both Gilead and Amgen beating estimates. However, earnings season remains challenging because stocks that miss estimates are punished severely.

Our Takeaways for the Week

• U.S. economic statistics are important, but have to be understood in context of other data because they are often revised multiple times and for several years
• In general, companies are managing well through a mixed macroeconomic environment

Disclosures

Ferguson Wellman Ranked a “Top RIA” by Financial Advisor

Ferguson Wellman Capital Management has been named by Financial Advisor magazine as a top investment company. Financial Advisor named Ferguson Wellman 44th out of 203 U.S. firms in the $1 billion-and-over asset category of their RIA rankings. Ferguson Wellman is the highest-ranked firm headquartered in Portland, Oregon. The listing is created by tracking distcretionary and nondiscretionary assets under management according to each firm’s ADV.

“We are fortunate that our firm has consistently experienced growth, not only in clients and assets under management but also employees and breadth of investment offerings and services,” said Mark Kralj, principal. “We attribute much of our growth to the confidence and trust clients have in us as well as the professionals in accounting, estate planning and private banking who we work with on behalf of our shared clients.”

Founded in 1975, Ferguson Wellman Capital Management is a privately owned investment advisory firm, serving clients with investable assets starting at $3 million. As of 2015, the firm works with more than 700 clients and manages over $4 billion that comprises separately managed accounts for individuals and families; foundations and endowments; and corporate and Taft-Hartley plans. West Bearing Investments, a division of Ferguson Wellman, serves individuals and institutions with assets starting at $750,000. All company information listed above reflects 6/30/15 data.

###

Earnings In Focus

by Shawn Narancich, CFAExecutive Vice President of Research

More Than Meets the Eye

While US stocks have remained in a trading range through the first third of earnings season, what lingers beneath the surface belies a market near recent highs. Set against a quiet week on the economic news front and at a time when the Greek melodrama is again fading from the headlines, investors put their full attention into discerning the health of corporate America. As measured by the market capitalization of reporting companies, this past week marked the most significant period of the second quarter earnings season. Though a plurality of those delivering numbers are beating bottom line estimates, revenues are coming in much more mixed given continued headwinds from the stronger dollar and weakening growth in China. Indeed, the Red Giant confirmed the latter earlier today by reporting surprisingly week manufacturing numbers that furthered the sell-off in commodities, rallied the dollar, and boosted bonds.

Not Sleepless in Seattle

In an earnings report that bore some resemblance to Google’s expense-driven earnings beat last week, internet commerce mainstay Amazon.com proved that even it can make money when it stops spending so much. Revenue growth has never been the problem for the folks headquartered in the Emerald City and, on that measure, Amazon continues to excel, reporting accelerating revenue growth that beat estimates.  What was somewhat surprising is that Jeff Bezos’s gang allowed some of the top-line largess to the bottom-line, reporting perhaps the most celebrated $92 million profit ever.  Once again, shorts betting against Amazon got hammered, as the stock surged 10 percent on the news in an otherwise down market. Although a resulting net profit margin of 0.4 percent is certainly not what most companies aspire to, it helped create $22 billion of wealth for Amazon’s shareholders today. For our part, we continue to avoid companies trading for 372x estimated earnings.

Not to be outdone by its Seattle neighbor, consumer darling Starbucks also delivered an upside earnings surprise, reporting that its new mobile ordering initiatives are helping drive traffic and boost same-store sales, which surged 7 percent. On the back of healthy top line growth that translated into a 24 percent earnings gain, Starbucks investors were greeted with further gains in the stock.

An Apple Bitten

In contrast to the wealth created by Seattle-based firms this week, Apple ceded some of its prodigious market value on reduced revenue guidance tied to moderating iPhone sales. While 33 percent quarterly sales growth for a company of Apple’s size is nothing short of extraordinary, when you get to be a company with annual sales approaching $230 billion, it’s only natural for investors to question what a company like this can do for an encore. For our part, we continue to view favorably the prospects of this reasonably valued technology titan.

Our Takeaways from the Week

• A heavy week of corporate earnings produced mixed results for investors

• Concerns about a slowing China continue to weigh on commodity prices

Disclosures

Ferguson Wellman Ranked Second on Portland Business Journal Money Management Firms List

Ferguson Wellman Capital Management is pleased to announce that the firm has been named by Portland Business Journal as a top money management firm in their 2015 Wealth Management and Financial Services Guide publication. Portland Business Journal ranked Ferguson Wellman second in Oregon and Southwest Washington on their list of 25 money management companies. The listing was created by calculating the total number of assets under management for Oregon and Clark County, Washington clients as of the second quarter of 2015.

“We are delighted to be honored by the Business Journal. However, what is of utmost importance to us is the trust our clients place in our firm. That means more than any award or ranking ever could,” 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 640 clients in 36 states, the firm manages $4.2 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 6/30/15)

###

Smoke and Mirrors

by Brad Houle, CFA Executive Vice President

Gyrations in the Chinese A-share stock market have been a big topic in the financial press recently. The questions that we are getting from clients all center on what the broader implications might be for the Chinese economy and the impact on Western economies. Bottom line, the Chinese A-share market gyrations are a circus side show that will not have real impact on the actual economy of China or the economies of the U.S. or Western Europe.

In fact, the recent events in the Chinese stock market are an excellent primer on what NOT to do while trying to develop free price capital markets. Currently, the A-share market is more rigged than a game of Three-card Monte and the government in Beijing is determined to build the world’s biggest casino. There has been a dizzying array of strategies employed by the Chinese government to first inflate the value of the market and then attempt to control its inevitable decline. Most investors in the A-share markets are Chinese retail investors. The use of borrowed money or margin was encouraged and the A-share market became the most levered financial market of all time for a short while. Since the market started its downward slide, margin debt has now been restricted. In addition, if you are a greater than 5 percent holder of a stock, you are now not allowed to sell for six months. In addition, 200 companies listed on the Shanghai exchange have suspended trading. This is only a partial list of the heavy handed tactics utilized by the government in an attempt to control the stock market. Capital markets that are free from unnecessary regulation and are as transparent as possible are vital to build trust with global investors. While China has gotten it wrong in the short-term, eventually they will get it right as the country transforms to more of a free market economy.

The Chinese A-share market is a rounding error in international equity indexes and Chinese exposure for our clients is accomplished via exposure to Hong Kong and its stock market’s H-shares, as well as Chinese companies that trade on American exchanges. Unless you are a retail investor in China who is invested in the Chinese A-share market, it is not impactful. What is important, however, is what happens in the Chinese economy.

Chinese GDP was released this week at a 7 percent year-over-year growth rate. It is an old story that global investors look at Chinese economic data with skepticism. If you look deeper at other economic indicators in China, the data suggests that a number much lower than 7 percent GDP is probably closer to the truth. One of our research partners, Cornerstone Macro, points out that as business confidence is at the lowest level in 16 years, electricity consumption is up just 1.8 percent, auto sales are down 40 percent and bank loan demand is lower. As such, Cornerstone theorizes that actual GDP growth is likely closer to 5 percent. China is the number two economy in the world, and what happens with the trajectory of the Chinese economy is impactful to the world economy. Currently, the U.S. and European economies appear to be decoupled from the Chinese economy and are benefiting from lower commodity costs and strong domestic economies.

Our Takeaways for the Week

• The Greek parliament voted to enact reforms agreed upon with the European Union this past Thursday. Once again, the “can” of the Greek Financial Crisis is getting kicked down the road
• The Chinese A-share market is unimportant in the global economy. Performance of the broader economy in China is of vital importance to the world economy and the trajectory of growth or lack of growth is something we are monitoring closely

Disclosures

Patience

by Ralph Cole, CFA Executive Vice President of Research

Patience

It’s been a strange week in “Euroland.” After a resounding “no” vote on the Greek debt bailout referendum last Sunday, it appeared that Greece was on its way out of the Eurozone. Capital markets promptly sold off early in the week.

Today it appears that Greece has delivered a reasonable response. “The program they are presenting is serious and credible,” said French President François Hollande.

We must admit that we have a tad bit of Greek fatigue in recent weeks, but it is clear that Greece is on everyone’s mind these days. The country has presented a 3-year plan, which is better than some of the temporary schemes that have been floating around the past few months. If it is accepted over the weekend, markets should continue to move higher along with yields. The removal of this distraction will allow the ECB to continue focusing on the nascent European recovery.

We continue to have our doubts for the long-term sustainability of Greece within the Eurozone. It doesn’t appear to us that the Greek people are committed to the structural changes that need to take place in order to pay their debts and make their economy more competitive in the future. This will not be the last time we talk about Greece’s debt, economy and leadership.

Roller Coaster

Compounding the volatility induced by Greece was the roller coaster known as the Chinese A-share market. As China tries to open its capital markets, they also must learn how to govern them.  Much like holding water in your hands, the tighter you grip, the more water that slips through your fingers. Confidence in the system is the most important element to a successful exchange. The more China tries to prop up their market the less confidence investors have in their system.

We are more concerned with underlying growth in China’s economy than we are with the volatility in their A-share market. It is clear that China’s growth is slowing and it is nowhere near the 7 percent reported by the Chinese government. Growth around the world is challenged and China’s growth is needed until the stimulus by other countries gets their economies growing.

We will continue to monitor their real economy closely in the coming months. We expect growth to pick up around the world in the second half of the year, but that forecast has come into question in recent weeks.

Our Takeaways for the Week

• Proper investment patience kept prudent investors from overreacting in a week packed with news flow
• Growth in the second half of the year should propel markets modestly higher

Disclosures

Q3 2015 Investment Strategy Video

Q3 2015 Investment Outlook Video

Mind the Gap

by Jason Norris, CFAExecutive Vice President of Research

Volatility in the second quarter reigned in both equity and bond markets. Interest rates rose close to half-of-a–percent, resulting in negative returns for bonds. While U.S. equities were volatile, they ended the quarter relatively flat. International markets were roiled in June with China equities moving into bear market territory following a parabolic run and as for Greece…

In the face of this uncertainty, we are still constructive on equities for the back half of 2015. The U.S. economy is slowly improving. Excluding energy, corporate profits should still exhibit high single-digit growth and equities are still relatively inexpensive. Therefore, with the Fed set to raise interest rates later this year, bonds will continue to face a headwind, thus equities warrant an overweight versus fixed income.

While headlines reported a healthy increase of 223,000 new jobs in the month of June, analyst expectations were a bit higher. Also, previous reports were revised lower and the labor participation rate declined, which resulted in a lower unemployment rate of 5.3 percent, which is a seven year low.

One of the major disconnects in the job market is that there are close to 5.4 million job openings currently in the U.S. This is the highest level we’ve seen since January of 2001. We believe this will provide a tailwind throughout 2015 in the labor market.

There are a lot of mixed data in Thursday’s report that can help us assess if it’s too hot, too cold, or just right. Therefore we do believe that our call that the Fed will raise rates later this year has not changed.

Grexit, Greferendum, Grapituation and Gratigue

Frankie Valli sang it best in 1978, “Grease is the word.” After missing a payment to the IMF on June 30, Greece headlines have rattled markets in the last few weeks and that volatility are here to stay with the possibility of a pending referendum on July 5 and a debt payment due to the ECB July 20. The key issue we are focusing on include whether or not the Greek contagion will affect other nations in southern Europe. Whether we have yet to see if the Germans will let the Greeks leave the Eurozone or if they will be “hopelessly devoted.” What has changed since 2010 is that Greek debt is now held by government agencies, such as the IMF and ECB, not banks. In 2010, 140 billion euros of Greek debt was held by global banks, with over 100 billion of that amount being held by European banks. The amount held by banks has dropped by over 100 billion with the European banks, on the hook for less than 20 billion.*

We don’t want to handicap the pending referendum (on whether vote for or against austerity) by the Greek people and current polls show a dead heat. What we do believe is that volatility will continue in July, fueled by Greece and earnings season; however, by year-end this Greek drama will be in the rear-view mirror.

Our Takeaways for the Week

• U.S. economic growth is improving and corporate profits will follow suit
• Greek headlines are just that, more headline risk than fundamental risk to the global markets

*Euro to US Dollar exchange rate was +0.13367 percent at time of publication.

Disclosures

Supreme Summer

by Shawn Narancich, CFAExecutive Vice President of Research

While Chinese stocks endured more losses in a week that now puts the A-Shares Index into correction territory, U.S. investors continue to preside over a range-bound market domestically. With U.S. equity indices near record levels and late quarter news flow reduced to a trickle, all eyes were focused on the U.S. Supreme Court decision this week regarding the legality of federal tax subsidies for states not running their own insurance exchanges. A high court ruling upholding a key tenet of the Affordable Care Act (ACA) was greeted with a sigh of relief by investors who own hospital stocks, while sending speculators short names such as HCA Holdings running for cover. While minor tweaks to the ACA are still possible, such as the repeal of the medical device tax, this week’s key ruling all but assures that the key structure of the national healthcare law will remain intact at least until the Obama administration leaves office.

Gathering Pace

As healthcare stocks reacted to the Supreme Court drama, investors with more cyclical leanings received the latest confirmation that moribund first quarter consumption and weak retail sales were transitory. U.S. consumption spending in May rose at the fastest month-to-month rate in nearly six years, and the 0.9 percent surge easily outpaced a smaller increase in consumer income. Indeed, the U.S. consumer has not forgotten how to spend! Coupled with a strong job market confirmed by a surge in May hiring and an upbeat retail sales reported for the same month, we are left to conclude that the U.S. economy has picked up considerable pace from the slight contraction it experienced during the first quarter. Our best guess is that the Federal Reserve will exit zero interest rate policy sometime later this year, and it will most likely be in September.

Greece Ad Nauseum

The melodrama of Greece failed to find a resolution this week, but European stocks seem to have found their footing nonetheless. Regardless of whether ongoing talks with Greece are successful in retaining the country as a solvent member of the Eurozone economy, the European Central Bank (ECB) has demonstrated its commitment to do, as chief Mario Draghi famously observed several year ago, “whatever it takes,” to keep the Eurozone and its currency viable. Exhibit A of this commitment is the ECB’s ongoing program to enhance the European monetary base by purchasing $60 billion of European bonds every month until at least the fall of next year. Exhibit B, key in the latest Greek crisis, is the central bank’s commitment to fund Greek banks with loans to accommodate ongoing deposit flight from these institutions. Our main observation here is that if no acceptable resolution is reached and Greece ends up leaving the common currency, then Europe and its central bank will do what is necessary to keep the region’s banking system and economies liquid, thus preventing any lasting type of contagion from Greece’s exit.

Our Takeaways from the Week

• The U.S. economy is perking up after a slow start to the year
• Global capital markets are unlikely to suffer any lasting repercussions from Greece, regardless of how the melodrama concludes