Today our firm celebrates Lynelle Tarter’s five-year anniversary with the firm, signifying the opportunity for her to become a shareholder. Lynelle joined the firm in 2007 and serves as audit administrator, responsible for reconciling individual portfolios and custodian statements on a monthly basis. “When Lynelle joined our firm, she didn’t have any prior experience in our industry,” said Kerrie Young, chief compliance officer. “What’s exciting about her becoming a shareholder is that she learned about our operations quickly and showed her perseverance. We reward employees for their commitment to their work through ownership.”
Becoming a shareholder is an important milestone at Ferguson Wellman. This month, Tarter joins Tracie Maslen as the newest shareholders, bringing the collective group that has ownership in the firm to 82 percent. Ferguson Wellman believes that ownership fosters continuity and longevity—attributes that directly benefit the clients we serve.
Flexer and Rudd honored again by Portland Monthly for excellence in wealth management
For the second consecutive year, Lori Flexer, CFA, senior vice president and Jim Rudd, principal and chief executive officer, have been recognized as Portland’s Five Star Wealth Managers by Portland Monthly magazine.
To read more, click here.
Weekly Market Makers: Week Ending 4/20/12
by Shawn Narancich, CFA
Vice President of Research
Under Promising and Over Delivering Investors were barraged with earnings reports from bellwether companies across the spectrum this week. While only about a quarter of S&P 500 companies have reported first quarter results so far, what is already clear is that analysts were too conservative in estimating the earnings power of corporate America. Companies beating earnings estimates outnumber those missing by better than a 4-to-1 ratio so far, with a fair number also reporting better than expected revenues. These trends are better than what we saw at the same time three months ago, and while companies aren’t highlighting it, those making money are benefitting from a leap-year quarter in which everybody gets one more day of sales.
The Shine Comes off Tech In discussing business trends, management teams are cautious in their outlooks and for the most part have avoided projecting first quarter beats into upwardly revised full-year forecasts. Banks like Citigroup, US Bancorp, and Bank of America are benefitting from moderate loan growth, reduced provisioning for bad debts, and improved capital markets activity; consumer companies Coca-Cola, Philip Morris International, and Kimberly-Clark from surprisingly decent volumes in the face of price hikes; and industrials such as Honeywell and GE from cyclical upturns in aerospace and energy. With the notable exceptions of Microsoft, eBay and Seagate—technology earnings are off to a murkier start with Intel forecasting less robust second-quarter margins, SanDisk citing poor semiconductor pricing and margins, and IBM and EMC both reporting lackluster hardware sales growth. The stocks reacted accordingly, with tech underperforming a market that rose for the first time in three weeks. Year-to-date, it remains the best performing sector of the market, but its lead has narrowed.
Summer Swoon? While earnings rage on, economic data has turned decidedly murky. Retail sales for March came in better than expected, but with building materials, auto sales and home and garden leading the way—one has to wonder if the warm spring pulled forward demand. Industrial production was flat for the second consecutive month and both the Philly Fed and Empire State Manufacturing indices waned, indicating a slowdown that could be reflecting the European recession and a weaker Chinese economy. Investors fear another year where strong first-quarter data give way to a softer summer. In contrast to this time last year, global central banks are in easing mode and petroleum prices are declining.
Easier Money in Emerging Markets Despite lingering inflation issues, India cut rates by 50 basis points, marking their first interest rate reduction this cycle, while emerging-market cousin Brazil continued on its path, cutting short-term rates by another 75 basis points. The rate move in Brazil is having the intended effect of reducing the real’s value, which is now down for the year against other major currencies. Domestically, weekly jobless claims have stopped improving, so with the stall in industrial production and weaker housing data of late, investors will tune into next week’s Federal Reserve meeting to see if “Bernanke & Co.” are any more amenable to another round of quantitative easing. In Europe, record high credit-default-swap spreads on Spanish 10-year debt accompanied by yields breaching the 6 percent level acknowledge the recession and funding issues that continue to plague this country. Amid stress and turmoil, the global safe-haven asset remained well bid, as benchmark 10-year Treasury yields closed the week to yield less than 2 percent.
Our Takeaway from the Week
- Earnings season is off to an encouraging start, but softer economic data has taken the punch out of stock investors
- Earnings roll on next week with energy, consumer and more tech companies in the spotlight.
Weekly Market Makers: Week Ending 4/13/12
by Shawn Narancich, CFA
Vice President of Research
A Lack of Follow-Through Stocks suffered their first back-to-back weekly declines since last fall as investors reacted coolly to the first trickle of first quarter earnings reports amid a preponderance of disappointing economic data. Despite unemployment falling to 8.2 percent in March, the monthly jobs report showed net job gains substantially undershooting expectations. A surprising increase in weekly unemployment claims also failed to inspire investor confidence. Nevertheless, several economists are raising their estimates for first quarter GDP following February data showing a smaller than anticipated trade deficit. After booking strong first quarter gains, stocks feel tired and investors appear prone to taking a glass half empty view of information flow, particularly with Europe back in the headlines and China reporting its weakest quarterly growth since 2009. The silver lining for China is monetary policy, which represents a put option for equity investors who witnessed another small move this week by the People’s Bank of China to ease the required reserve ratio for large banks. With inflation there having cooled, Chinese stocks rallied on the news. Domestically, the decline in stocks produced additional gains for bonds, pushing the yield on benchmark 10-year Treasuries back below 2 percent.
Ready or Not, Here They Come In what might be described as a case of buying the rumor and selling the news, earnings season began with a resounding thud. Basic materials bellwether Alcoa kicked things off Tuesday by reporting profits buoyed by strength in aerospace and automotive markets when investors were expecting a loss. While the good news for Alcoa resulted in follow-through for the stock, the result for other early reporters was more akin to the North Korean rocket launch. Burgeoning mortgage loan fees and better capital market results underpinned earnings beats for both J.P. Morgan and Wells Fargo, but both stocks declined and underperformed their sector benchmark after registering strong first quarter gains.
Profitless Prosperity? Then there’s Google, where earnings swept past estimates on moderating headcount gains that boosted margins. However, investors were more concerned by accelerating erosion in the company’s key “cost per click” metric, or the revenue that Google receives when Internet surfers click on ads accompanying search results. This pricing is under pressure as the mix of Google’s business shifts to mobile search, where advertisers pay less for click-throughs on smart phones. The irony here is that Google has been a key player in developing the mobile Internet with its company-sponsored Android operating system. Investors will have many more earnings reports to parse next week when 91 companies reports first quarter results.
Our Takeaways from the Week
- Following strong first quarter gains, stocks are taking a breather amid weaker economic data and festering debt issues inEurope
- Investors are greeting early first quarter earnings reports in tepid fashion
Weekly Market Makers: Week Ending 4/5/12
A Fade of the Risk Trade Europe delivered three body blows to equity markets this week, dampening increasingly bullish spirits following U.S. stocks’ best quarterly start since 1998. Eurozone unemployment was reported to have risen again, to a rate of 10.8 percent that now stands at a 14-year high. As well, risk appetites waned after a lack of new monetary stimulus from the European Central Bank (ECB) and a surprisingly poor Spanish bond auction that pushed interest rates on 10-year debt to a multi-week high of 5.74 percent. While Italy’s new technocratic government has made what appears to be an earnest attempt at labor market reform amid implementation of austerity measures, Spain’s rising risk premium reflects its relative intransigence regarding austerity measures dictated by European leadership. Spain is attempting to meet Brussels part way with a plan to reduce its budget deficit to 5.4 percent of GDP; however, with unemployment above 20 percent and fiscal austerity being implemented as part of the new budget, this cat will struggle to catch its tail. The U.S. Federal Reserve’s revealed lack of appetite for QE3 also dissuaded investors, resulting in equity markets retreating by about 1 percent. Will tomorrow’s monthly payroll report make for a Good Friday? U.S. stock investors will have to wait until Monday to weigh in because markets here are closed tomorrow. Amidst choppier seas, Treasuries rallied.
A Tradition Unlike Any Other Golf fans will enjoy what promises to be great theatre at the Masters this weekend as Wall Street gears up for its own tradition that begins anew next week. Analysts project first quarter earnings to grow at a low single-digit rate that would be the slowest rate in several years. Will companies once again under-promise and over-deliver? While investors might think that a steady stream of better-than-expected economic data in recent months would be factored into estimates, consensus estimates have moved very little so far this year. The trade-weighted dollar actually fell 2 percent in the first quarter versus widely held expectations for continued strength amid the stress and turmoil that characterized Europe at year-end. What’s germane to the earnings of multi-national companies is the average exchange rate for the period, and with the dollar trending lower throughout the quarter, investors could be surprised by not only the translated value of foreign earnings, but more importantly any forecast updates that companies factor into their 2012 outlooks. Alcoa, JP Morgan, and Wells Fargo will kick things off next week with their first quarter numbers.
Our Takeaways from the Week
- Europe threatens to become a problem again for equity investors
- First quarter earnings reports on tap
Weekly Market Makers: Week Ending 3/23/12
by Jason Norris, CFASenior Vice President of Research
Comfortably Numb This week, the Supreme Court heard arguments on the constitutionality of the Patient Protection and Affordable Care Act (PPACA) of 2010. The main issue that 26 states brought to the court was regarding the individual mandate. The fundamental question was whether or not Congress can require individuals to purchase a product. If it is determined that this mandate is unconstitutional, the question remains as to whether the entire act is unconstitutional, or if this provision is “severable?” While it is difficult to handicap Supreme Court hearings, there are many indications that the individual mandate will be found unconstitutional. The questioning by the Justices led us to believe that they were troubled with the argument that Congress could force individuals to purchase insurance—including coverage they may not feel they need. Also, there is the concern about the slippery slope this may create regarding the authority Congress has to mandate a specific action.
Many are speculating whether or not the rest of the PPACA can continue forward. Will Justice’s feel comfortable in striking down some provisions, while enabling others? The key provision to be addressed is the guaranteed issue of coverage, which forces insurance companies to accept all applicants at the same rate. This provision would be detrimental to the health insurers, thus we believe it will be struck down along with the individual mandate. If this occurs, the Court must decide if they have the ability to make policy decisions by upholding some provisions and striking down others—or will these actions alter the PPACA so much that it essentially eliminates the intention of the law?
With the belief that the guaranteed-issuance provision will be struck down in some sense led to a rally in the HMO stocks this week. We reduced some exposure to this area the last few months due to the uncertainty; however, we still remain overweight the industry and view their fundamentals as strong.
Money for Nothing Corporations issued over $1.16 trillion of debt in the first three months of 2012, which is the largest amount on record. With rates at historic lows and tight corporate bond spreads, companies have come to the markets to raise cash. What they are doing with all this cash remains to be seen. Corporations have been building their cash hoards over the last few years. We have seen some pick up in capital spending as well as dividends, but companies are still cautious due to economic … and political uncertainty.
Who’s Buying all the Debt? With the federal government over $15 trillion in debt coupled with records amounts of corporate bond issuance—why are interest rates still low? Investors who continue to be skittish of equities are willing to park their money in low-yielding instruments rather than take any equity risk. Even with stocks up over 12 percent for the first three months of 2012, investors redeemed close $30 billion inU.S.equity funds and invested over $72 billion in taxable bond funds. There has not been a lack of supply of dollars to soak up all the debt coming to market, which has kept rates low.
Our Takeaway for the Quarter Strong corporate earnings and balance sheets, low valuations and plenty of funds on the sidelines support our confidence in equities.
Weekly Market Makers: Week Ending 3/23/12
by Shawn Narancich, CFAVice President of Research
Parking Planes in the Desert The fact that Fed Ex reported quarterly earnings that nearly doubled is not nearly as important as the factors cited for reducing its current quarterly outlook—namely slower economic growth. The freight delivery companies are important bellwethers for investors because their businesses touch a significant percentage of worldwide output. The news that management lowered its estimate of global GDP growth this year from 2.9 percent to 2.3 percent sent a chill through the financial markets, particularly after both Europe and China reported another month of declining manufacturing activity. Part and parcel with its dimmer economic outlook, Fed Ex cited high oil prices as one of the reasons for idling aircraft until higher margin airfreight demand improves. Despite these discouraging developments and other notable lukewarm earnings reports, equity markets retained an underlying bid and held up relatively well, with the S&P 500 declining by just 0.5 percent amid a recovery in benchmark Treasuries.
Home Sweet Home Has the housing market bottomed? This is a top-of-mind question for many investors nowadays amid homebuilder stocks rocketing higher some 75 percent since last fall. Well, pick your poison, because several key housing reports this week lent credence to opinions of those in both camps. February housing starts and new home sales both undershot estimates while declining in February, but starts are near a three-year-high. Similarly, February existing home sales declined, but are up nearly 9 percent in the past year. Against a backdrop of generationally low mortgage rates and firming labor markets, housing affordability has improved markedly, with notable homebuilder optimism signaling that we have indeed seen the worst of the housing decline. Warm weather has probably pulled forward some demand for housing, but the rise in new housing permits signals better activity and firmer pricing despite a continued overhang of shadow inventory in the existing home market.
You Just Can’t Make This Stuff Up The improbable saga of Brazil versus Chevron et al continued this week with news that the host of the 2016 Summer Olympics has filed criminal charges against the oil producer and its drilling contractor, Transocean Offshore, following an oil spill there last November. So how many thousands of barrels spewed into the sea to precipitate such drastic action? As many as ... three. To put this into perspective, BP spilled over five million barrels in the Gulf of Mexico in 2010. Despite cleaning up the minor spill, remediating the well, and putting a containment device on the area that recently spilled another one barrel—Chevron now faces multi-million dollar fines and the leader of its Brazilian operation up to 31 years in jail.
Although as Chevron’s lawyer stated, “Not even one sardine perished in this spill,” the company has been barred from drilling any more wells offshore Brazil. This tempest in a teapot does more than discourage other oil companies from investing in Brazil; it makes drilling contractors like Transocean (once bitten twice shy after Macondo anyway) rethink their commitment to providing the services necessary for Brazil to monetize its deepwater riches.Brazilmay have up to 25 billion barrels of oil in the Santos Basin, but without the high-tech drilling rigs and associated services from other contractors, all this oil will do them little good underneath 6,000 feet of seawater and two miles of salt.
With deep water drilling markets notably tight and leading-edge dayrates breaching $600,000, Brazil does not have the captive audience it may believe amid target-rich acreage elsewhere. In fact, one of its biggest competitors for drilling and completion services used to be its “neighbor,” West Africa offshore Angola. When the continents were joined, it was all one big oil deposit. So while losing foreign direct investment from the major oil companies may not be top of mind for state-owned oil company Petrobras, its cavalier treatment of oil service companies like Transocean could cause its erstwhile enablers to ply more contractor-friendly markets elsewhere.
Our Takeaway from the Week
- The stock market remains resilient amid more mixed economic data
- The worst is behind us in housing
- Brazilshould avoid irrational treatment of its oil service suppliers
Weekly Market Makers: Week Ending 3/16/12
by Shawn Narancich, CFAVice President of Research
Don’t Worry, Be Happy Jamie Dimon has a reputation for irreverence that was reinforced this week when JP Morgan scooped the Fed by announcing that not only had it had passed the bank stress tests, but that it also planned to boost the dividend and repurchase billions more in stock. Whether the flap at JP Morgan was justified or simply reflected a misunderstanding about the timing of the central bank’s announcement, it opened the floodgates for 18 other large financial institutions to chime in about how their balance sheets would withstand the buffeting of 13 percent unemployment paired with tumbling home and stock prices. This time around, all but government-owned Ally Financial passed the test, though Citigroup, SunTrust, and MetLife were rebuffed in their proposals to return capital to shareholders. The stress tests turned out to be a catalyst—not only for the bank stocks, which were catapulted to the top of the performance charts year-to-date—but also for the broader markets, with the S&P 500 closing at nearly a 4-year high.
A Full Year of Returns in One Quarter While the bull market continued this week, the landscape is changing and headwinds are building. The Fed proved to be a catalyst by upgrading its economic outlook ever-so-slightly, but it was enough to dampen investors’ expectations for QE3 and send bond investors to the exits. After hovering around 2 percent since last fall, the benchmark 10-year Treasury yield broke a tight trading range and rocketed upward to 2.3 percent. Utilities got clobbered and consumer discretionary stocks lost a bid. Since the rally began last fall, the number of stocks making new highs has declined, volumes have been low, the put-to-call ratio has fallen and transportation stocks have failed to keep pace with the broader market. Technically, stocks appear extended and due for a pullback.
Running Out of Gas? This week’s inflation numbers confirm our increasing concern about high oil prices, which have boosted pump prices to upwards of $4.00 a gallon. The geopolitical premium from uncertainty surrounding Iran’s nuclear program as well as actual supply tightening caused by the European oil embargo have caused benchmark Brent pricing to reach levels where demand destruction is starting to occur. While inflation remains well contained at 2.9 percent, 80 percent of the sequential increase in February’s CPI came from higher gasoline prices—and more importantly for consumer spending power—price increases are outpacing income gains. Retail sales met expectations, but higher fuel prices boosted that number as well. As such, we remain underweight consumer discretionary stocks (while positioned defensively within the sector) and equal-weight energy.
Our Takeaway from the Week While we have reservations about the fast start to this year, our longer term optimism about equities is anchored by the following:
- continued evidence of economic expansion
- attractive company valuations
- companies rich with cash able to drive mergers and acquisitions
- investor skepticism about stocks evidenced by high allocations to bonds and large sums of uninvested cash
Weekly Market Makers: Week Ending 3/9/12
by Shawn Narancich, CFAVice President of Research
A Three-Year Old Bull Friday marked the three-year anniversary of the low in U.S. stock prices precipitated by the financial crisis. Despite the fact that the U.S. economy supports five million fewer jobs than it did in the spring of 2009, GDP is at record levels and the stock market has more than doubled since then. That we experienced the year’s first substantial decline this week is only fitting, given the turmoil associated with that volatile period. On Wednesday, lingering uncertainty about the Greek debt situation and a reduction in China’s targeted growth rate were the catalysts for investors to take profits, driving the Dow 204 points lower. The sell-off proved short-lived, with investors heartened by news of strong private-sector payroll gains reported first by ADP and later confirmed by the Labor Department’s monthly payroll tally. Technology held up well in Tuesday’s sell-off and remains the best performing sector of the market year-to-date.
Greece. . . Ad Nauseam The world’s largest sovereign default became official as Greek bond investors approved a debt restructuring that eliminates over 50 percent of its principal obligations, extends debt maturities and reduces the interest rates on this debt. The agreement was forged by hook or by crook, with Greece triggering collective action clauses that forced holdouts into accepting the deal. What followed was a ruling that by the International Swaps and Derivatives Association that will trigger payments on $3 billion of credit default swaps owned by certain holders of Greek debt. Despite the stock market’s initial swoon on this news, the money center banks that underwrote these policies should be able to make the payments without incurring meaningful hits to capital.
Going to Work Manufacturing job creation more than offset job cuts in the government sector to produce a net non-farm payroll gain of 227,000 in February. This was also accompanied by upward revisions that boosted both the December and January numbers previously reported. Despite the constructive jobs report, growth in the labor force caused the unemployment rate to remain lodged at 8.3 percent. Meanwhile, the January trade picture reported Friday was not so good. The U.S. trade deficit rose to the highest level since fall of 2008 and chastened economists who might otherwise be tempted to boost their first quarter GDP numbers amid a preponderance of strong economic reports.
A Dubious Distinction The dust surrounding the European Central Bank’s most recent monetary stampede has settled and what has emerged is the world’s largest central bank balance sheet, now sized at a cool 3 trillion Euros. Judged relative to the size of the European economy, it amounts to over 30 percent of GDP, eclipsing the U.S. Federal Reserve’s 2.8 trillion dollar balance sheet, which represents about 20 percent of our economy. The ECB’s Long-Term Refinance Operation was clearly successful in alleviating the funding pressure on European banks (in the short-term), but investors are right to question the long-term repercussions of unwinding this unprecedented stimulus in the event that inflation rears its ugly head. As the late Milton Friedman famously noted, “There’s no free lunch.”
Corporate news flow has lightened with the unofficial end of earnings season, but investors will be fed a new diet of economic news to chew on next week, including February inflation numbers, retail sales and industrial production. We remain attuned to this data and company updates surfacing from the conference season now in full swing.
Insurance Risk Analyzer
Helena B. Lankton
Senior Vice President and Wealth Management Committee Chair
Ferguson Wellman occasionally invites industry professionals to address our firm on topics beyond investment management that are important to our clients.
On March 13, our firm’s Wealth Management Committee met with Candace Jennings of Jennings Insurance Agency to discuss some of the unique insurance needs our clients have.
Candace shared a useful worksheet with the firm to help us better serve our clients in this area. Called the Risk Analyzer, this resource helps clients better understand their risk and where they might require additional insurance.
You can find the Risk Analyzer here.
Beth Brown Craven joins the Ferguson Wellman team
Today we welcomed a new addition to our firm. Beth Brown Craven has assumed responsibilities of serving as executive assistant to Principal and CEO Jim Rudd.
With over 20 years of experience in the financial services industry, Brown Craven brings a deep understanding of client service and knowledge of transaction requests, reporting and the technology used to manage accounts. Craven was born and raised in Portland, Oregon, and completed her B.S. from the University of Santa Clara. She has two teenage daughters, enjoys tennis and fine merlot.
Lori Ferraro served as Rudd’s assistant for eight years. She continues to be employed at the firm, serving in a support role to the executive assistant team. She is working part-time to spend more of her week with her two young sons.
Weekly Market Makers: Week Ending 3/2/12
by Jason Norris, CFASenior Vice President of Research
Three Is the Magic Number It’s been a week of milestones; we saw the Dow Jones Industrials crack 13,000—the first time since May 2008. The NASDAQ breached the 3,000-point level for the first time since December 2000 and Apple became the fifth company ever to cross the $500 billion in market capitalization. While the two indices couldn’t hold their respective levels, Apple continued its move upward throughout the week. The stock is up 30 percent since they reported earnings five short weeks ago. It will be interesting to see if investors sell the stock after the release of the iPad 3 on March 7. We continue to like the growth profile and view it as a core holding.
Tech Makes the Word Go ‘Round Speaking of technology stocks, there were two major events this last week for industry analysts. The City of Barcelona hosted the Mobile World Conference where vendors demonstrated new products and highlighted major announcements and relationships. Morgan Stanley also hosted its annual technology conference in San Francisco.
Consistent themes across both conferences were rapid growth in Internet data applications and expansion of the Cloud. As wireless networks increase their data speeds, the use of data centers grows exponentially, rather than storage directly on devices. With Apple's announcement of the iPad 3, which will offer HD video quality, more data will be streaming over wireless and wire-line networks; and the data will have to be stored someplace as well as managed securely.
Getting Paid for Investments A theme that came across at the Morgan Stanley Tech Conference was the use of cash and dividends. A few short years ago, talk of dividends at a tech conference would be blasphemous, but now with the hoards of cash on corporate balance sheets, dividends have become a topic of discussion. One wild card is the proposed changes in the dividend-tax rate. We don't believe that this proposed change will have a major impact on the value of the equity market; however, corporate finance will be affected. Companies may choose to buy back stock, rather than issue or raise dividends. This would make it even harder for investors looking for income to find it.
Our Takeaway from the Week We continue to overweight tech due to strong product cycles and healthy balance sheets.
Tracie Maslen celebrates five years with Ferguson Wellman
Today our firm celebrated Tracie Maslen’s five-year anniversary with the firm, signifying the opportunity for her to become a shareholder. Tracie joined the firm in 2007 and serves as executive assistant to Lori Flexer, CFA. “Tracie’s energy, disposition and ability to multi-task has been very beneficial to our clients,” said Lori Flexer. “Not a week goes by when I don’t receive an unsolicited word of praise for her excellent client service.”
Becoming a shareholder is an important milestone at Ferguson Wellman. With Maslen joining the ranks of shareholder, she brings the collective group that has ownership in the firm to 79 percent. Ferguson Wellman believes that ownership fosters continuity and longevity—attributes that directly benefit the clients we serve.
Weekly Market Makers: Week Ending 2/24/12
by Jason Norris, CFASenior Vice President of Research
Greece Is the Word The week started off with a positive catalyst as the EU and IMF set conditions for the Greek debt restructuring. Unfortunately, if you are a bond holder of Greek debt, you will only receive 46 cents on every $1.00. Despite these returns, we believe this is a good first step in resolving the debt crisis. Now that this milestone has been reached, the European banks will begin to feel the effects of these “adjustments” as major institutions will have to take write downs, such as RBS, Commerzbank and Credit Agricole. Investors are becoming more confident that the EU IMF will collectively resolve the debt issues in Europe as shown by declines in the bond yields in countries, such as Spain and Italy.
Home “in” the Range Yields on the 10-year Treasury have been hovering around 2 percent for close to six months, even as we’ve seen economic improvement in theU.S. The Federal Reserve remains active in the bond market buying longer-term Treasuries to keep rates low and has just announced another $400 billion purchase program. Another large buyer of bonds is theU.S.retail investor. Even as rates have steadily declined the last 12 months, investors continued to pump money intoU.S.taxable bond funds. Over that period of time, investors have poured over $125 billion into taxable bond funds, while redeeming over $168 billion in equity funds. Individual investors are still very skittish about equities; we believe this may be “fuel” for the equity markets as the economy improves and investors become less risk averse.
We Can Work It Out Jobs data showed a steady improvement this week, with weekly unemployment claims dropping to its lowest level since March 2008. This indicator is one we follow closely due to its timeliness. We are also seeing resurgence in manufacturing jobs for the first time since the 1990s. Productivity gains and the increasing cost competitiveness of theU.S. labor force is making domestic manufacturing more appealing.
The jobs picture is going to be key for this election. Since World War II, an incumbent president has not been re-elected with the unemployment rate over 7.5 percent. The most recent report for January was 8.3 percent but does seem to be declining.
Taxman Although the President released his tax overhaul proposal this week, the biggest near-term “tax” and risk to the U.S. economy seems to be gasoline. We have seen a steep increase in the price of fuel over the last couple weeks. The effect this increase will have on spending may be meaningful, especially on the low-end consumer. In the first four months of 2011, gas prices increased 30 percent, resulting in significant negative revisions to U.S. GDP. We remain underweight consumer sectors due to concerns about spending, as well as increasing input costs pressuring margins.
Keep Holding On Even after a 9 percent increase in stocks year-to-date, we believe equities are still attractive. Corporate earnings remain strong and economic growth in the U.S. is improving. The volatility that we anticipated earlier this year has yet to show itself in 2012, but many important policy issues have not yet been addressed that need to be resolved before the end of the year. We continue to focus on large-cap domestic equities with attractive dividends.
Our Takeaway from the Week While stocks may see some near-term profit-taking, we see equities supported by the following:
- improving economic growth
- “under-owned” by individual investors
- low interest rates
- attractive valuations
- continued M&A and share buybacks
Weekly Market Makers: Week Ending 2/17/12
by Shawn Narancich, CFAVice President of Research
Volatility: Wherefore Art Thou? Stocks have now completed seven straight weeks of trading in the new year without a pullback of 100 points on the Dow, which might not be so remarkable if it didn’t follow the last five months of 2011 where 41 percent of the trading days were marked by 2 percent +/- daily price swings. To the bulls who are enjoying a steady stream of better-than-expected economic news, a lack of hedge fund participation and still nascent retail-fund flows imply more upside potential for stocks. This week, applications for new unemployment claims hit a four-year low, inflation numbers came in below expectations and two regional manufacturing indices confirmed the expansion of U.S. manufacturing. As markets closed up 1 percent for the week, the S&P 500 is threatening to push through key technical-resistance levels.
The Big Apple The purveyor of now ubiquitous iPhones and iPads eclipsed ExxonMobil to become the world’s most valuable company, pushing through $500/share this week before suffering an acute case of vertigo. As mentioned in a previous Weekly Market Makers log, the company’s huge market capitalization is having an outsized impact on equity indices and related statistics. In this case, a 24 percent gain in 2012 has catapulted technology into the top slot for sector performance, eclipsing both basic materials and financials year-to-date.
A Rigged Market Typically, an 8 percent gain in stocks driven by better economic data would incite inflation concerns and push bond prices down and yields up; however, with benchmark 10-year Treasuries trading to yield 2 percent, losses in bonds have been modest. Why? The Federal Reserve continues to execute Operation Twist, by selling shorter dated securities in favor of longer maturity debt. This indirect monetization of U.S. debt couldn’t come at a better time, what with the Treasury now financing $10 trillion of externally held obligations. What will be interesting to see is how the Fed unwinds its nearly $3 trillion balance sheet … if and when it needs to push up interest rates by selling this debt.
Caught between a Rock and a Hard Place After the deal to sell Pringles to Diamond Foods fell through because of the latter’s accounting improprieties, Procter & Gamble quickly found a new buyer at the same price, helping complete its objective to exit the food business. Kellogg, which already owns Keebler snack foods, agreed to gobble it up for a cool $2.7 billion cash. Why pay nearly twice sales for this old grocery aisle snacking staple? Largely to avoid the fates of competitors like General Mills and J.M. Smucker Company, which both disappointed investors this week with poor earnings. Combining Keebler with Pringles’ established sales channels overseas delivers compelling distribution synergies that should enhance profitability, increase exposure to faster growing, less competitive emerging markets and reduce Kellogg’s reliance on a mature cereal category that has for years been the subject of profitability-denting market share wars.
So what’s wrong with General Mills and Smucker? Both tried to raise prices and both experienced a cold shoulder from customers. Raise prices on Smuckers jam, Folgers coffee, and Cheerios? See volumes fall. Maintain pricing to fend off cheaper private label options? See gross margins plummet. Herein lies the intractable challenge to consumer staples companies operating in mature markets where brand equity is low. It’s one of the key reasons why both Kellogg and Procter & Gamble rose on news of the Pringles deal.
Next week brings the likely European approval of a new bailout package forGreeceand related Greek debt restructuring news, as well as major retailer earnings reports.
Our Takeaway from the Week While stocks seem ripe for profit-taking, we see equities supported by the following:
- faster economic growth
- improving fund flows
- attractive valuations, and
- continued deal flow
Weekly Market Makers: Week Ending 2/10/12
by Shawn Narancich, CFA Vice President of Research
Too Many Cooks in the European Kitchen Greece is once again in the headlines as it attempts to convince key political parties, unions and its citizens that more austerity measures are needed to avoid defaulting on 14 billion euros of debt maturing next month. At stake is a new bailout package that European creditors, the IMF and the European Central Bank (ECB) all must agree upon before funds are disbursed. One logjam disappeared when the ECB agreed to join other Greek creditors in accepting less than 100 cents on the dollar for its debt, furthering the chances of a negotiated restructuring. But as Friday’s strikes and protests in Athens show, this is a tough nut to crack. Tourists, good luck finding a bus ride to the Parthenon.
While the Greek drama plays out, the ECB kept short-term rates at 1 percent this week and is encouraging European banks to participate in the next installment of its three-year loan program due later this month. Liquidity provided by the central bank has been key to calming European bond markets so far this year.
Despite Greece, a Firmer Tone to the U.S. Economy Renewed tensions in Greece spilled over into U.S. markets Friday, with stocks selling off and erasing the week’s modest gain, as cyclical sectors led the decline. Although trading volumes remain light so far this year, stock prices continue to be supported by encouraging economic data. Weekly unemployment claims fell again and money supply statistics are confirming the loan growth necessary to fuel expansion. Accordingly, economists have begun to ratchet up their estimates of first quarter GDP.
Delivery Is Guaranteed, but for Whom? Canadian Prime Minister Steven Harper flew to Beijing this week for only the second time in his six-year tenure, and it wasn’t to chastise China for voting against the UN resolution to push Syria’s Assad from office. At $100 oil, only Saudi Arabia has larger oil reserves than Canada, and Harper is seeking to secure buyers as it ramps up its oil sands production. Why not ship it south? The reason is the oil needs a pipeline for transit, and Washington refuses to issue the permit for the Keystone Pipeline Project. The oil will be produced either way because Canada stands to gain. The price of oil from Canada’s WesternSedimentaryBasin was recently quoted at $62; compare this with similar quality crude from offshore Nigeria at $120/bbl and the economics come into sharp focus. The sooner Canadian oil reaches water, the narrower this differential will become, so whether it be the U.S. Gulf Coast or the Port of Kitimat, British Columbia—Canada’s oil is destined for higher priced markets.
Perspective on Earnings Season With about two-thirds of the S&P 500 having now reported fourth quarter earnings, slower growth, peaking margins, and less optimistic guidance are evident. How significant has Apple’s earnings power become? Exclude it from the S&P 500 and the 5 percent profit growth reported so far drops to less than 2 percent. Bellwether names such as Cisco and Coca-Cola reported encouraging results this week but the stocks failed to respond as investors pause to reassess substantial gains already realized. The final weeks of February will book-end fourth-quarter earnings, giving investors the opportunity to assess reports from smaller companies and the retailers, which report a January fiscal year-end.
Weekly Market Makers: Week Ending 2/3/12
by Shawn Narancich, CFA Vice President of Research
U.S. Economy Surprisingly Strong Economic data stole the show from earnings reports this week, validating stocks’ strong start to 2012. The U.S. economy created 243,000 net new jobs in January, exceeding the top-end of estimates and confirming the consistent downtrend in weekly jobless claims. Detail in the January jobs report showed that over 20 percent of the gain came from manufacturing—demonstrating a renaissance of sorts for “Smokestack Americana.” Japanese automakers are relocating auto production stateside to lessen the negative impact of a strong yen and chemical companies are building new factories here to take advantage of low-cost natural gas feedstock—compliments of the shale drilling boom. Job gains were confirmed by another encouraging report on monthly manufacturing domestically, with similar January data from Europe improving as well. U.S. auto production rose and retail chain-store sales were stronger than expected. Our takeaway is that first-quarter GDP appears to be growing faster than expected.
Earnings Season Moves to Late Innings With well over half of the companies in the S&P 500 having reported at this point—company commentary, encouraging economic data and recent weakening of the dollar support expectations for mid single-digit earnings growth in 2012. Amazon reported quarterly revenue that surged by 35 percent, confirming the increasing popularity of online shopping and the company’s as-yet-undemonstrated ability to make much money from it. Investors are left to ponder why the stock trades for 137x earnings expected to be flat in 2012. All the while, UPS is happy to ship the goods that Amazon sells at a 1 percent profit margin; it reported strong quarterly profits and credited increased U.S. shipments for the upside to estimates. Elsewhere, Broadcom and Qualcomm testified to the boom in wireless device sales, with both reporting earnings upside driven by surging smart phone and tablet volumes. Refining results were predictably lousy in the fourth quarter, but industry plans to shutter unprofitable capacity are having the intended effect, pushing gasoline refining margins back over $20 a barrel, measured against West Texas Intermediate oil prices.
Facebook Gives “Thumbs-Up” to IPO Rising stock prices have put the capital markets back on offense—and this week investors received confirmation that the social networking giant will offer shares to the public for the first time ever. Private market trading of Facebook indicates a valuation of the company approaching $100 billion … or a cool 100x earnings. Why such a high valuation? Facebook has revolutionized the business of display advertising, offering companies the opportunity to leverage targeted advertising to audiences based on users’ public profiles. What’s that noise? It’s the sucking sound of Facebook ad dollars being pulled away from Yahoo, which continues to lose market share. It is anticipated that the “Facebook Effect” will also impact Google’s giant advertising presence in due time.
Investment Outlook Video: First Quarter 2012
As we progress through our Outlook 2012 season, we wanted to share an abridged version of the presentation we are sharing at 13 events in communities where our clients reside. This year's Outlook focuses on issues facing Europe, our upcoming election and why in today's volatile markets we believe you must be "present to win." To view our abridged 8.5-minute video of our Outlook 2012 presentation, please click here or on the image below.
Weekly Market Makers: Week Ending 1/27/2012
by Shawn Narancich, CFA Vice President of Research
Easy Money As Far As the Eye Can See The Fed concluded its policymaking meeting this week with Chairman Bernanke accomplishing two long-held goals: providing additional transparency to markets (short rates telegraphed to remain near zero until late 2014) and targeting an explicit inflation rate of 2 percent. As well, Friday brought investors their first view of fourth quarter GDP growth which, at 2.8 percent, modestly undershot expectations—but represented the strongest rate of expansion since the first quarter of 2010. Excluding the boost from inventory restocking, real final sales grew at an anemic rate of just 0.8 percent. QE3 anyone?
Apple Headlines Heavy Week of Earnings A plethora of companies delivered fourth quarter results this week that, for the most part, supported stock prices, which finished the week unchanged on the S&P 500. Apple delivered what was arguably the best quarter ever reported by a public company, delivering record sales and earnings that blew past expectations—not by millions, but by billions of dollars. As our technology analyst Jason Norris noted, “ ‘twas an Apple Christmas.”
At least for now, Apple’s riches come at the expense of its telecom partners that distribute the iPhone. Both Verizon and AT&T reported profit declines because of losses they incur when selling the device. The idea is that they will recoup the subsidy with pricier smartphone plans over time. How successful has this been? Over the past three years, Ma Bell’s operating income has declined and operating cash flow is flat.
In general, more companies are calling out pension, currency and European headwinds for 2012, but industry leaders like Apple, EMC, Caterpillar, and McDonalds are managing through the challenges, prospering in a slow-growth environment by continuing to capitalize on their substantial competitive advantages. Commodity cost inflation is evident in poor refining results being reported by big oil and consumer companies like Colgate and Procter & Gamble, but for consumer staples companies at least, gross margin headwinds should abate in 2012 as grain prices moderate.
Whistling Past the Graveyard? The World Economic Forum in Switzerland commenced this week and Europe remains the center of attention. While the IMF presses for more aid to the beleaguered southern periphery, Germany remains reluctant to boost the size of Europe’s bailout fund and the Greek debt restructuring festers. A key question is whether the ECB will ultimately accept losses on the Greek debt it owns. Despite England’s report that is has joined so many other European nations in announcing economic contraction in Q4, Spanish and Italian bond yields continued to fall. How deep the downturn becomes hinges on policy actions that unify the continent fiscally without prescribing an overbearing level of austerity that crushes aggregate demand.
Low Natural Gas Prices Elicit Supply Response Investors took notice this week when Chesapeake Energy announced that it would be curtailing natural gas production because of low prices. Conoco-Phillips announced similar moves. Producing an existing well is relatively inexpensive once it is drilled and completed, so prices have to be very low to incent producers to shutter production when it typically generates at least a contribution margin. Whether production shut-ins gather momentum below $3.00 gas remains to be seen—but for now, it looks like Chesapeake may have helped call the bottom in the “clean” hydrocarbon, with prices rebounding 15 percent this week. Notwithstanding the bounce, domestic natural gas is almost seven times cheaper than oil on an energy equivalent basis.
Weekly Market Makers: Week Ending 1/20/12
by Shawn Narancich, CFA Vice President of Research Earnings: Week Two Stocks tacked on another 2 percent in week three of the new year, and are now trading at levels not seen since last summer. Fourth-quarter earnings are now in full swing, with over 12 percent of the S&P 500 having reported. A plurality of companies has exceeded expectations, but more are missing compared to recent quarters. Citigroup, Capital One, and the trust banks fell into the latter camp and were punished accordingly. Yet, despite the decidedly mixed results for financials, the group again outperformed as institutional investors appear to be reallocating to last year’s worst performing sector.
U.S.banks are revealing notable loan growth, and while faster Q4 economic growth is certainly to credit, balance sheet retrenchment by European peers facing enhanced capital requirements could also be boosting their market share. More generally, companies face headwinds in 2012 that didn’t exist at this time last year, including a stronger dollar, a European recession, less advantageous bonus depreciation, and pension funding headwinds. Therefore, Q4 earnings may not turn out to be the positive catalyst they have been in recent quarters.
Tech: So Far, So Good With the notable exception of Google, tech earnings are off to a solid start. The big cap triumvirate of IBM, Microsoft, and Intel all reported solid results that were well received by investors. Most enlightening were two key earnings reports from the semiconductor sector: Linear Tech and Xilinx. Both companies reported a pick-up in orders at quarter-end. For several months, chip stocks have shed bad news surpassingly well as investors speculated that the cycle had bottomed, so with evidence of a cycle turn in hand, investors greeted the news warmly, pushing the group up 8 percent. Peak earnings reports occur over the next two weeks as energy, industrial, and healthcare companies take center stage.
Macro Economic news continues to support the rally in stocks. Initial jobless claims retreated, benign consumer prices confirmed a moderating of inflation, and the Empire State Manufacturing Index came in strong. The Fed meets next week and, while policy is likely to remain static, investors are expecting enhanced communication about the rate outlook. Europe was again surprisingly quiet, with debt auctions keeping bond yields below the key 7 percent level in Spain and Italy. China reported sub-9 percent economic growth in Q4, but the numbers came in ahead of expectations and stocks rallied on the news.