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Weekly Market Makers Week Ending 6/15/12

by Shawn Narancich, CFA Vice President of Research

Another Summer Swoon? Evidence of slower global growth continued to build this week, with declining industrial production in Europe and several disappointing reads on the U.S. economy being the latest culprits. May retail sales undershot expectations and contracted, representing the second consecutive month of declining U.S. sales. Given a U.S. economy still leveraged to consumer spending, amid further signs of a weak job market, economists are reducing their estimates for second quarter GDP. With industrial production also falling short in May, expectations are building for the Federal Reserve to announce another round of monetary stimulus when the Federal Open Market Committee meets next week.

Inflation Pulls a Disappearing Act Disinflation is the silver lining of an economic slowdown both here and abroad. To that end, investors absorbed news that the consumer price index has dipped for the eighth consecutive month to 1.7 percent domestically, a level now below the Fed’s 2 percent target. What about inflation fears overseas? The trend is our friend there too with European consumer prices up 2.4 percent annually and only 3 percent in China. For the spending power that remains, it will increasingly drive real as opposed to nominal economic growth.

Europe, Ad Nauseam Spain announced a 100 billion euro bailout package for its under capitalized banks and investors were disappointed to discover that the euro zone bailout will not flow first to the banks but rather to the Spanish government. Heaping more debt onto Spain’s already large pile while subordinating Spanish bondholders to the bailout loans went over like a lead balloon, pushing Spanish benchmark 10-year bond yields there to nearly 7 percent. Before we even see details of the Spanish bank bailout program, investors are already beginning to discount a Spanish government bailout, which would certainly be even more costly. Contagion has also spread to Italy where similar duration sovereign yields again breached the 6 percent level. Amidst the gloom and doom, equity markets confounded conventional thinking and rallied another 1.2 percent domestically, while remaining largely stable in Europe. However, in contrast to recent risk-on, risk-off trades, benchmark 10 year-Treasury bonds failed to confirm the rally in stocks, closing the week up from where they started, while pushing yields down to a thrifty 1.58 percent. In a nutshell, we appear to be at that point again where bad news is good news, leading investors to discount more monetary stimulus both here and abroad.

Our Takeaways from the Week

  • Amid slowing economic growth, investors appear dependent on further policy action to support additional near-term stock gains
  • The Greek elections, U.S. Federal Reserve policy, and G-20 meetings in Mexico next week all loom LARGE

Disclosures

Investment Strategy Update – 6/13/12

Groundhog Day – The European Edition

Reminiscent of the 1993 film where Bill Murray finds himself repeating Groundhog Day over and over again, global capital markets again are being held hostage by the rolling sovereign crisis in Europe. The steep market sell-off in recent weeks serves as a vivid reminder that the path toward a "solution" in Europe will be neither linear nor quick. With Greece flirting with an exit from the EU, sovereign yields in Italy and Spain around 6 percent and global capital fleeing for safety--volatility-weary investors are finding these events as tiresome as waiting for a rodent to see his shadow.

What is the endgame for Europe? Never underestimate the ability of policy makers to find a new way to "kick the can" down the road. Though in the near-term; government leaders are opting for the most politically expedient path--ultimately they will be forced to act in the best interests of their respective nations. For Greece, we believe they will come to their senses and realize that the costs of exiting the Euro are so high that they will accept austerity terms and remain. For Germany, we anticipate that they will eventually endorse a closer fiscal union. In short, we believe that the 17-member European Union will remain intact … for now.

Much can still go "right" Market volatility will most certainly remain elevated as the media continues to provide nonstop coverage of the potential for a financial contagion in Europe, stubbornly high unemployment in America and an uncertain economic growth rate in China. The aforementioned risks not withstanding, with equities underowned and undervalued, there are a host of potential positives for risky assets that received little media attention.

Specifically, the potential that soaring Spanish and Italian interest rates force policy makers into action sooner rather than later, that slow job growth prompts the Fed to initiate "QE3," the prospect of the Supreme Court repealing Obamacare and bipartisan action to address the pending "fiscal cliff" could all could serve as near-term catalysts for equities.

Barring any change in our fundamental thesis, if the equity market were to sell-off approximately 9 percent to 1,200 on the S&P 500, we would view this as a buying opportunity.

Asset allocation At this juncture, we are comfortable with the allocation strategy that we outlined in our January 2012 Outlook titled "Must Be Present to Win." Recognizing the growth risks around the globe, we remain underweight international equities, neutral bonds and large-cap equities. We are overweight "tactical," which is a basket of both public and private vehicles (commodities, private equity, hedge, etc.) that collectively have a low correlation to core asset classes.

Becoming more U.S.-centric We are maintaining our current asset allocation, reflecting our belief that the U.S. will continue to be a pocket of economic strength relative to the rest of the developed world. Accordingly, we are in the process of modestly realigning our large-cap domestic sector weightings to increase exposure to industries and companies that derive a larger percentage of their revenues domestically. As such, we are reducing our commitment to technology and industrials, sectors that are relatively export-heavy in their customer mix, and increasing our weightings in consumer discretionary and telecommunications.

As always, if you have any questions, please do not hesitate to contact us.

Best regards, Investment Policy Committee George Hosfield, CFA Marc Fovinci, CFA Ralph Cole, CFA

Disclosures

Cole Quoted by Bloomberg News about Wells Fargo

Bloomberg reporter Dakin Campbell interviewed Senior Vice President Ralph Cole, CFA, about Wells Fargo’s mortgage strategy. Cole said, “I’ve never been a big believer of market share for market share’s sake. If their underwriting standards are dropping to achieve it, that’s what would worry us as investors.” *This journal entry includes links that take readers to content that is not managed by Ferguson Wellman. We can not confirm that the information is current nor accurate.

Disclosures

Weekly Market Makers Week Ending 6/8/12

by Shawn Narancich, CFA Vice President of Research

In China, Sell on the Rumor and Sell on the News Investors got what they were waiting for in China this week, as the central bank there took the next step to halt the country’s weakening economy with an interest rate cut The reaction in Chinese stocks?  They fell on the day prior and on the day after the move by the People’s Bank of China. While Chinese stocks remain underwater year-to-date on concerns about slowing growth and lack of a “shock & awe” stimulus program like China instituted during the financial crisis several years ago, U.S. stocks rebounded nearly 4 percent in what turned out to be one of the strongest weekly gains of the year. As investors ventured back into domestic equities, the benchmark 10-year Treasury yield went up, ending the week at 1.63 percent.

Monetary Policy to the Rescue? If U.S. equities weren’t as oversold as they were coming into the week, the result might have been different. Investors were left wanting with a lack of actionable announcements by both the U.S. Federal Reserve and the European Central Bank. Europe left its 1 percent short-term interest rate target unchanged, and Fed Chairman Bernanke failed to tip his hand to Congress about what, if any, new monetary stimulus it might offer to rejuvenate a weaker economy. With political leaders on both sides of the Atlantic far from agreement on how to address their respective fiscal challenges, investors continue to look to monetary policy as the antibiotic to stave off infection. The problem is that, with each additional dose, the infection becomes more resistant to the treatment. To conclude the analogy, surgeons general in both Europe and the U.S. have told patients that they stand ready to provide additional treatment, if necessary.

The Next Domino to Fall in Europe Central bankers will most likely get that chance, as sovereign debt yields in Spain remain above an unsustainable 6 percent level, indicating that it’s only a matter of time before this country seeks financial assistance. European finance ministers will meet tomorrow and plan to discuss the mechanics of a Spanish bailout. For its part, Spain is awaiting a key report from the International Monetary Fund that purports to show the additional capital that its banks need to remain solvent. With German Prime Minister Merkel warming to the idea of pan-euro bonds and common EU deposit insurance at some point, European leaders appear closer to embracing the necessary fiscal integration in concept. Unfortunately, no nation there yet seems willing to cede budgetary and banking oversight to a central EU authority.

A Catalyst Rich Calendar Which brings us back to Bernanke & Co. Recognizing the challenges of Europe and the looming fiscal cliff domestically, the Fed could do a QE3 but likely wants to keep its options closer to the vest for now. Results of a potential Spanish bailout, Greek elections on June 17, and additional domestic data will all bear on their decision to be made at their meeting on June 19 and 20. A key question domestically is whether recent soft payroll gains reflect payback for a record warm winter or something more sinister. Reality is probably somewhere in-between.

In a week dominated by macroeconomic policy events, Australia cut rates by another quarter of one–percent, and emerging Asian economy Vietnam cut rates by two percentage points as central bankers in the Asia Pacific attempt to fend off slower export markets to China and Europe.

Our Takeaways from the Week

  • U.S. stocks rallied from oversold levels as investors continue to closely monitor events unfolding in Europe and potentially systemic contagion therein

Weekly Market Makers Week Ending 6/1/12

by Shawn Narancich, CFA Vice President of Research

Risk Off It used to be that rising bond prices would accompany rallies in the stock market, but those halcyon days of the 1990s are long gone, leaving investors to ponder the wreckage in equities as the 10-year U.S. Treasury yield fell to an all-time low of 1.46 percent this week. U.S.stocks have erased most of their year-to-date gains, and emerging market stocks are now underwater as investors “batten down the hatches” for an environment of slower economic growth worldwide, punctuated by unpredictable shocks from Europe.

In the U.S., investors witnessed downward revisions to first quarter GDP, another weekly rise in jobless claims, and the coup de grâce of a payroll report that undershot even the most pessimistic forecasts. If this wasn’t enough to dampen investor moods, the Department of Labor reduced previously reported job gains and announced that the unemployment rate rose to 8.2 percent. The fact that the Institute for Supply Management’s monthly manufacturing report came in at levels showing continued expansion provided little relief to investors who are increasingly concerned by what they see domestically and overseas.

Europe Festers Spain’s plan to recapitalize Bankia (the nation’s third largest lender) with government-issued bonds went over like a lead balloon, as the European Central Bank balked at the idea of using this backdoor maneuver to fund an undercapitalized lender. European leaders appear no closer to bringing the necessary fiscal union to their collection of 17 countries that share a common currency. Accordingly, the euro is under pressure and Spanish sovereign 10-year debt yields are now well above 6 percent, an unsustainable level for their debt load. Ahead of government elections considered key to deciding the fate of Greece on June 17, retail and corporate customers of Greek banks are increasingly taking their deposits elsewhere, fearing a Greek exit from the euro would devalue their deposits. With the economy there continuing to deteriorate, European leaders, who are scheduled to meet again this weekend, may decide that another dose of policy medicine is necessary.

BlackBerry Anyone? In the category of slow-motion train wrecks, BlackBerry maker Research in Motion announced that it will lose money in the second quarter as it continues to cede market share to Android and Apple smartphones. It has hired JP Morgan to investigate strategic options ahead of what increasingly appears to be its “Hail Mary pass” of launching an all-new device this fall. The news did little to assuage investors, as the stock fell another 9 percent this week.

Natural Gas Exports Fall Victim to Politics Finally, what would this week be without a comment about natural gas, the only major commodity to rise in the month of May? For the third consecutive month, the U.S. Department of Energy (DOE) announced onshore supply declines domestically, the result of reduced drilling for natural gas in light of its low price. Despite an overabundance of the stuff and proliferating demand for natural gas overseas, the DOE announced this week that it will be unable to approve new liquefied natural gas exports until … after the presidential elections.

Our Takeaways from the Week

  • Softer economic data coupled with lack of a comprehensive solution to Europe is pressuring stocks
  • While volatility will remain elevated, we see longer-term value in equities amid an extended period of low interest rates

Disclosures

Ferguson Wellman ranked “RIA Titan”

Industry publication InvestmentNews recently released their top 50 registered investment advisers (RIAs) in the U.S. based on assets under management. Ferguson Wellman was ranked 32 nationally.* Of the 33 RIAs listed in Oregon, Ferguson Wellman was ranked number one by discretionary assets under management. The results are from the RIA Data Center.** **Methodology: InvestmentNews qualified 2,322 firms headquartered in the United States based on data reported on Form ADV to the Securities and Exchange Commission as of May 1, 2012. To qualify, firms must have met the following criteria: (1) Provided investment advisory services to clients in the latest completed fiscal year. (2) No more than 25% of client assets is attributable to pension and profit-sharing plans. (3) No more than 50% of client assets is attributable to pooled investment vehicles. (4) No more than 25% of client assets is attributable to corporations or other businesses. (5) Is not compensated for advisory services by commissions. (6) Offers financial planning services. (7) Does business neither as a broker-dealer nor as a registered representative of a broker-dealer. (8) Does not have both a related person who is a broker-dealer and a related person who is an insurance company or agency.

Disclosures

Weekly Market Makers Week Ending 5/25/12

by Shawn Narancich, CFA Vice President of Research

My Idea of Growth Stimulus Is Different than Yours Stocks rose in Europe and the U.S. this week, breaking recent downtrends despite increasing evidence of slower global economic growth and continued existential threats to euro unity. Despite a 1.8 percent rise in the S&P 500, Treasuries remained well bid as the benchmark 10-year finished close to unchanged. An informal meeting of European heads of state earlier in the week failed to reach consensus on how to move the Eurozone past the Greek crisis, with liberal leaders supporting relaxation of austerity and the issuance of common Eurozone bonds while Germany’s Merkel remains firmly opposed. The European Union already has common monetary policy; the question investors increasingly want answered is whether it will also have fiscal unity. Merkel appears to be under increasing pressure to soften her stance, but with Greece’s liberal left thumbing its nose at the country’s latest bailout package and overwhelming support by Germans for Merkel’s tough-love policy, Greece may fall by the wayside before it sees the benefit of any Eurozone bond issuance. Germany’s idea of growth stimulus is to relax rigid labor laws that preclude companies from firing workers more freely and targeted tax incentives to attract investment, not further forbearance for Greece or relaxation of budget deficit targets.

Headwinds Mount As Europe festers, its economy appears to be slowing further, as evidenced by this week’s reported decline in the May Eurozone Purchasing Managers Index to its lowest reading in almost three years. Of note, Germany’s previously unassailable economy also took a hit, with its industrial figures contracting. The slowdown in Europe also appears to be impacting China; with exports to its largest trading partner pressured by weaker consumer demand on the Continent, its manufacturing indices showed contraction for the seventh consecutive month. Completing the circle of disappointing economic news was the U.S. release of non-defense durable goods orders ex-aircraft that fell for the second consecutive month. Increasing evidence of a global slowdown has moderated investors’ enthusiasm for tech stocks, as this sector has now ceded its sector lead so far this year to the consumer discretionary stocks. Somewhat surprisingly, tech stocks finished the week in positive territory despite notable earnings misses by Dell and a shockingly weak forecast by storage systems supplier Network Appliance.

Throw the Markets a Bone What worked this week? PetSmart, which reported 39 percent earnings growth on healthy same store sales comps and higher full-year earnings guidance. The stock rocketed 14 percent higher, affirming the notion that even in an increasingly uncertain economy, people still spend money to feed Fido. So with Dell, Cisco, and now Network Appliance all providing anecdotal affirmation of the disappointing durable goods report for April, investors are seeing evidence that mounting fiscal uncertainty domestically is starting to impact business behavior. With 221 days to the “fiscal cliff,” the Supreme Court’s pending decision on ObamaCare, and presidential and congressional elections this fall, unusually large doses of uncertainty appear to be weighing on the economy. We will see more evidence about how this dynamic is playing out with next week’s employment report, the domestic purchasing managers report, and additional housing data.

Our Takeaways from the Week

  • European woes and fiscal uncertainty domestically are weighing on the global economy
  • Despite the worries, we should all have a great Memorial Day Weekend

Disclosures

SnowCap Community Charities expresses appreciation for time and donation

Each spring, Ferguson Wellman organizes a company retreat that encompasses some volunteer work and team-building activities. This year’s retreat-planning committee included Tim Carkin, Mark Kralj, Chad Long, Shawn Narancich and Lynelle Tarter. The group took our employees east of Portland to Gresham—a community steeped in history dating back pioneer days. The day started at SnowCap Community Charities*, a nonprofit that has provided providing food, clothing and advocacy to 1.4 million people in the past 40 years. Ferguson Wellman employees sorted donated items for their store, prepared soup, assembled boxes and learned more about the organization. Prior to leaving, Ferguson Wellman presented Executive Director Judy Alley with a new printer and microwave.

At the end of the day, the firm had dinner together at Sayler’s Old Country Kitchen.* For more than 65 years, this third-generation family business has served dinners and is well known for their 72-ounce steak challenge.

*This journal entry includes links that take readers to content that is not managed by Ferguson Wellman. We can not confirm that the information is current nor accurate.

Disclosures

Weekly Market Makers: Week Ending 5/18/12

by Shawn Narancich, CFA Vice President of Research

A Game of Chicken It appears to have come down to this. As markets convulsed again with the results of European elections, investors are wondering whether Greece will adhere to its committed austerity or call the northern tier’s bluff and reject the planned spending cuts and tax increases to which Greece already agreed. If we are to believe the young new leader of Greece’s ascendant left wing party Syriza, it will be the latter. The fact that stocks sold off over 4 percent this week while Treasury yields plumbed record lows is the best evidence yet that Greece’s turn to the left could metastasize into something more problematic than elections in an otherwise irrelevant country. In addition to the potential rise of Spanish and Italian bond yields to unsustainable levels, investors fear a Greek exit from the euro would dent the continent’s banking industry through full write-off of recently restructured debt. More importantly, there is potential for a run on the banks as investors flee countries whose legacy currency would devalue their deposits. Evidence of the latter emerged this week in Greece, and rumors of it are surfacing in Spain amid further credit downgrades of 16 Spanish banks by rating agency Moody’s. Who will blink first?  Investors may get more clues this weekend at the G-8 meetings being hosted in Washington D.C.

Thumbs Up, Sort Of The most eagerly anticipated IPO of the year occurred Friday, much to the delight of new shareholders who enjoyed as much as an 11 percent first day pop in the stock before seeing it close nearly unchanged in a poor market. IPO pricing at $38 was good enough for many of Facebook’s institutional investors, who decided to offer substantially more of their stock at the upwardly revised offering price. A key question is whether the smart money got out ahead of what could be a reality that undershoots the company’s euphoric valuation. The fact that GM, a key member of the automotive industry (advertising’s biggest client), decided to opt out of Facebook’s paid-in model is a data point not easily ignored.

Investors Shop the Retail Aisle Juxtaposed against the hoopla of Facebook’s IPO, retailers struggled to draw attention to their week in the spotlight, as many of the largest came to the earnings confessional to report what were largely a decent set of results. A standout exception was JC Penney. It missed same store sales estimates (down a staggering 19 percent), margin expectations, and well … pretty much all that mattered. The stock was crushed, leading investors to surmise that key competitors like Macy’s and even beleaguered Sears are taking advantage of new management’s overhaul of the retailer’s business model. Penney is experiencing turbulence as former Apple executive Ron Johnson struggles to transition shoppers away from couponing to an everyday low price strategy; clearly, selling nifty technology in a modern, clean cut store to customers who really want it is much different than persuading customers to walk down to the end of the mall and buy differentiation-challenged apparel. Also of note is a subtle shift that seems to be occurring in higher-end retailing, as Nordstrom missed earnings estimates and Saks reduced its same-store sales outlook. Only time will tell if the greater investments being made at Nordstrom and dampened sales outlook at Saks are emblematic of past turns in luxury retailing that coincided with a weaker stock market.

Our Takeaways from the Week

  • Europe’s sovereign debt crisis continues to hang over the equity markets like a dark cloud
  • As the demand for Facebook shares showed, there is plenty of capital to be deployed seeking growth in an economic environment where it is scarce

Disclosures

CEO Jim Rudd pays homage to Bishop Dagwell at Arlington Club dinner

On May 17, our CEO Jim Rudd spoke at the thirteenth annual Bishop Dagwell dinner at Arlington Club in Portland. The Club was founded in 1867 by 35 businessmen seeking, “ … to provide a meeting place for discussing their own and Portland’s destiny.” Some of the notable names who founded Arlington Club included William S. Ladd, Henry Failing and Captain J.C. Ainsworth. Bishop Dagwell was in residence at Arlington Club for 27 years and died just steps away from the club in 1963. He had just finished delivering Sunday evening service, drove himself home and collapsed getting out of his car. Included in Rudd’s remarks about Bishop Dagwell’s passing were his observation of other news that made the headlines that week.

“Reading a paper* that covered Bishop Dagwell’s passing were two other articles prominently featured—mere coincidence but I found their timing fascinating. One day later on June 3 the leader of my Church, Pope John XXIII, died of heart failure and there’s a story about his legacy with numerous quotes from President Kennedy. Equally interesting is an article between the pictures of Bishop Dagwell and the Pope with the headline, ‘Judge delays ruling on Governor Wallace.’ As you know, Bishop Dagwell was an outspoken critic of racial discrimination and a supporter of civil liberties—not an easy mantle to carry in the first 50 years of the 20th century.”

Rudd served as president of Arlington Club in 2002 and has been a member since 1987. Other Ferguson Wellman professionals who have served as Arlington Club President include Co-Founder Joe Ferguson and Senior Vice President Helena Lankton.

*This journal entry includes a link that take readers to content that is not managed by Ferguson Wellman. We can not confirm that the information is current nor accurate.

Disclosures

Weekly Market Makers: Week Ending 5/11/12

Jason Norris of Ferguson Wellmanby Jason Norris, CFA Senior Vice President of Research

What a Long, Strange Trip It’s Been In the early spring of 2010, things were starting to look up. We were a year into the stock market recovery and had witnessed the popular equity indices almost double from their March 2009 bottom. Unemployment had started to improve and GDP was accelerating. Retail investors were getting comfortable with stocks again, which resulted in positive inflows to equity mutual funds.

Those “green shoots” wilted two years ago this week, when the flash crash hit the markets and the Greek “crisis” began to unfold.

The advent of these two events had major ramifications on the psyche of individual investors. The crisis in Greece unveiled the major structural problems of European economies. Their reliance on ever-increasing levels of debt and taxes to meet their welfare needs became unsustainable. The Greek crisis created a “domino effect” that forced austerity measures needed in their country as well as Ireland, Italy, Portugal and Spain. The recent elections in Greece and France have made it clear that the populous position is resistant to spending cuts and living within their means. Only time will tell how this will play out, but these political and economic events have increased volatility in the global equity markets and increased uncertainty regarding the European Union and Europe growth.

Dark Shadows The flash crash occurred on May 6, 2010, when the Dow Jones Industrial Average fell almost 1,000 points intra-day and recovered most of its loss before the close. This “crash” was the result of selling pressure from quantitative investors, as well as high-frequency trading that fed on itself. Having only begun to recoup the losses of 2008, investor confidence in the markets was rattled by this volatility. Over the last two years, individual investors have sold $260 billion worth of equity mutual funds, while investing over $360 billion in bond funds (even as interest rates were falling to historic lows).  Though stocks are up roughly 20 percent over this time, there is a growing suspicion among investors that the “game was rigged.”

While we cannot control what happens in Europe, we (investors and industry participants), can provide input to improve transparency into our market structure and alleviate some of the fears the investing public has. While short-term volatility may continue, we believe there has been considerable structural market innovation since May  of 2010, and for long-term investors, short-term volatility may provide opportunities.

The CFA Institute held its annual meeting earlier this week, and a focus of the meeting was to lighten the “dark shadow” over the equity markets. While most professional investors are highly ethical, some have given the profession a bad name—most recently MF Global.  While some may argue that a lot of the trading (high frequency, dark pools, etc.) has increased volatility, it has also meaningfully decreased the cost of transactions and increased liquidity. For long-term investors, this is a major improvement.

Two Strikes We saw two large negative corporate events this last week. First, Cisco Systems stated they are seeing customers becoming somewhat more cautious in there spending patterns, primarily due to uncertainty in Europe. We believe Cisco is well positioned going forward, and while seeing some near term headwinds, we are positive on the stock for long-term investors.

Second, JP Morgan (JPM) announced late Thursday that it had major losses in its credit portfolio. The company is considered one of the best at managing credit risk and if they are facing challenges, we anticipate less sophisticated players may also be having issues as well.

Our Takeaway for the Week

  • It’s never a dull moment in the markets, and we would anticipate continued volatility in the months ahead
  • In the long term, we believe equities offer great value; however in the near term, interest rates may continue to decline, which will benefit fixed income positions

Disclosures

Weekly Market Makers: Week Ending 5/4/12

by Shawn Narancich, CFA Vice President of Research

Paying up for “The Scream” When payroll processor ADP releases its monthly tally of net job changes for private sector clients, Wall Street reacts to the data as an advance read on the Labor Department’s more widely followed payroll report. The ADP number often misses the mark substantially, but in April, the softer labor market predicted by the measure was spot-on and contradicted an encouraging drop in weekly unemployment claims. Perhaps it was fitting that a painting dubbed “The Scream” garnered a record high $120 million winning bid in a week when investors were disquieted by a payroll report showing a second consecutive month of weaker job growth, with the reported 115,000 gain in net non-farm jobs only 3,000 off the number reported by ADP. Government job cuts again dampened job creation and one also has to wonder if the unusually warm winter pulled forward the demand for labor into January and February. In either case, investors took little solace in the unemployment rate dropping a tenth of a percent to 8.1 percent because evidence indicates the drop was caused by discouraged job seekers exiting the workforce. The cyclical energy and technology sectors led the way down in a sell-off to conclude a week when bonds rallied and stocks fell by over 2 percent. If not for a surprisingly strong uptick in the monthly Purchasing Managers Index gauging the level of domestic manufacturing activity, losses would likely have been worse.

Markets Working Their Magic Amidst the decline in risky assets, natural gas stands out, and this time it isn’t for being pilloried by Wall Street for its ubiquity, but for the fact that it has now rallied 20 percent in the past eight trading days during a time when worries about an economic slowdown have pushed benchmark crude prices down by over 4 percent. On Tuesday, the cleaner burning commodity responded to a Department of Energy report showing that production in the lower 48 states declined by 0.6 percent in February when compared with the previous month, the largest such decrease in a year. Anecdotal evidence of a tightening market came from gas production leaders Exxon Mobil and EnCana, which reported voluntary cutbacks in output while at the same time adding to the cacophony of producers telling investors that their capital spending budgets are going almost entirely to finding and developing crude oil and natural gas liquids. On the demand front, usage is skyrocketing as utilities mothball coal-fired power plants and crank up their natural gas-fired generators that in many cases were used only to serve peak loads. Accordingly, February data showed that natural gas used to generate electricity rose by 35 percent. Two other demand sources loom large:  natural gas used to fuel commercial trucks and export demand for liquefied natural gas (LNG). Judging by the jockeying we’ve seen by companies ranging from Cummins, which has successfully developed a compressed natural gas engine for Class 8 trucks, to large utilities like Sempra Energy and Dominion Resources that are already lining up LNG customers for new export facilities, these emerging markets should help tighten the supply-demand equation more than is commonly presumed by $2.38 gas.

Closing the Door on Another Earnings Season Nearly 85 percent of the S&P 500 has now reported what has turned out to be another strong quarter of earnings, with upper single-digit profit growth accompanied by earnings estimates that have gravitated upward on the encouraging numbers. Investors will now begin to focus more on the continuing flow of economic data and geo-political developments to gauge whether corporations can continue to drive the type of profit growth demonstrated in the first quarter. In this environment of heightened economic uncertainty, one factor looms large—the approach of what has been deemed the “Fiscal Cliff” whereby the Bush tax cuts, the payroll tax cut, and sequestration-driven spending cuts threaten to ding the economy by as much as 3 percent of GDP next year.

Our Takeaways from the Week

  • Stock prices have softened with the labor markets amid less favorable economic data
  • Natural gas is bucking the trend of lower commodity prices

Ferguson Wellman co-founder Norb Wellman honored by Oregon State

Although Norb Wellman was honored almost year ago with the Martin Chaves Lifetime Achievement Award from Oregon State Athletics, we recently discovered this video and are delighted to post it on our online journal. In addition to conveying Wellman’s accomplishments in athletics, business and philanthropy, the video highlights our CEO Jim Rudd, who shares his personal relationship with him and some history about Ferguson Wellman. Oregon State also honored Wellman in 2007 by making him a lifetime trustee of their foundation. His leadership, management and generosity are grounded in Ferguson Wellman’s goals of achieving Investment Excellence and earning Lifelong Relationships.

Disclosures

Weekly Market Makers: Week Ending 4/27/12

by Shawn Narancich, CFA Vice President of Research

Spoon Fed with a Fire Hose Investors were bombarded by over 500 earnings reports across sectors this week, headlined by Apple which again blew away consensus expectations. After officially correcting, its stock rocketed 9 percent higher on a 92 percent surge in profits, adding the equivalent of Hewlett-Packard’s market cap in one day’s trading. While sales growth of the iPhone is slowing domestically, Apple’s phone sales in China are skyrocketing. Domestically, AT&T benefitted from reduced subsidy costs on fewer new iPhone customers, driving improved wireless profitability and better-than-expected earnings. Investors greeted the news enthusiastically, sending Ma Bell up 6 percent. Closing the loop on telecom, the news wasn’t so good for the cellular service providers offering less expensive pre-paid service, as Leap Wireless and MetroPCS Communications both missed estimates and saw their stocks plummet by 25 percent and 12 percent, respectively. The contrast in outcomes here can be attributed to two key factors—premium devices and superior networks—the combination of which AT&T and rival Verizon Wireless enjoy at the expense of smaller operators.

A Commodity of Contrasts Integrated oil companies Exxon Mobil and Royal Dutch Shell demonstrated that all gas production is not created equal; while Royal Dutch reported earnings growth above expectations that was driven by international natural gas projects, Exxon Mobil undershot expectations, reporting earnings that fell 7 percent. Many moving parts explain the story, but one contributing factor to Exxon’s underperformance was low U.S. natural gas prices that dampened the profitability of its petroleum production. Past web logs have noted the distinction between domestic and international gas prices, but with the U.S. commodity languishing at prices of $2 per thousand cubic feet, how good must Royal Dutch feel to have a substantial portion of its gas production coming from Australia and Asia, where pricing for LNG cargoes is as high as $18/Mcf? We do not expect this price arbitrage to persist longer-term because markets will ultimately prevail in normalizing the differential, but for now, the contrast is striking.

Facebook Downdraft Perhaps the most attention-grabbing earnings headline of the week came from a company that is not yet publicly traded: Facebook. We noted with surprise that the social networking giant reported declining first quarter profits ahead of their planned IPO next month. Although revenues increased 45 percent from a year earlier, they dropped sequentially and earnings fell 12 percent year-over-year. Investor demand for this IPO will still be tremendous, but one has to question whether a rumored $100 billion valuation is appropriate for a business model with only $1 billion in profits that’s already experiencing growing pains.

Is Another Summer Swoon on the Way? Meanwhile, economic data continues to weaken in the month of April as euro zone manufacturing activity declined andEnglandofficially entered recession while domestically, durable goods orders fell in March and 2.2 percent first quarter GDP growth undershot expectations. After the Fed meeting this week in which near-zero interest rate policy was maintained, investors took Bernanke’s post-meeting commentary to read that QE3 is a medicine approved for use if the recent soft patch of economic data metastasizes.

Our Takeaway from the Week

  • Strong earnings trumped weaker economic data as investors pushed stocks higher by nearly 2 percent

Disclosures

Nineteen children spend the afternoon at Ferguson Wellman

In celebration of the Nineteenth Annual Take Our Daughters and Sons to Work® Program, Robin Freeman led a team of seven Ferguson Wellman employees that created a meaningful and memorable day for children ranging from ages 3 to 13. This national day is designed to provide a hands-on, interactive day that connects children with their parents’ work and helps them start to articulate and envision what their own path may be in the future. Even at a very young age, children have dreams and aspirations. It was very rewarding for Ferguson Wellman employees to get a glimpse of the future by spending time with them in a work environment.

Rather than having each child “shadow” and adult, Robin and the team gave them a productive agenda to follow. Starting with a presentation led by Jason Norris, the kids learned about the many ways they could spend, save or invest their income using characters from the movie “Monsters, Inc.” as examples. The kids then moved to various stations in the office for activities that included trading with gum and candy, creating personalized business cards with titles, assembling quarterly reports and learning more about technology by touring our serve closet. The day ended with a viewing of “Monsters, Inc.” in the boardroom.

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Investment Strategy Update - 4/27/12

Shifting to REITs

Over the past several months, we have allowed cash levels to build in client portfolios to approximately 3 percent. At this juncture, we are deploying this cash to broaden our commitment to Real Estate Investment Trusts (REITs). We have been underweight our REIT asset class for several years as we believed that large-cap domestic equities offered greater value. REITs today provide a better risk/reward than cash, and we think it is prudent to move toward a neutral weighting in REITs.

Why do we like REITs today?

  • Currently, yield on our REIT strategy is around 3 percent, which is significantly higher than cash and more attractive relative to current Treasury-bond yields.(see chart above).
  • We believe that over the next few years, many individual REITs are well positioned to increase their dividends by 5 to 7 percent annually.
  • There has been a huge lack of supply in the real estate space and companies with assets are now benefitting from increased rents.
  • Public REITs continue to opportunistically take advantage of distressed sellers in this environment.

Though we are increasing our commitment to REITs, our shift does not necessarily reflect enthusiasm toward all real estate categories. At present, two sectors that we find attractive are apartments with strong rent growth and select hotels exhibiting domestic and international growth.

Over the past several years we've continually diversified client portfolios to guard against the inherent risks to the global capital markets. We believe adding REITs to client portfolios at this juncture will increase the overall risk/return profile of accounts.

Ferguson Wellman's Investment Policy Committee is responsible for making the "top-down" decisions that dictate the allocation of capital among asset classes, and for identifying the broad investable themes and sector targets that our analysts and portfolio managers seek to implement in their respective areas of expertise.

The information provided herein is for educational purposes only and should not be construed as investment advice or as an offer or solicitation. Not all securities are suitable investments for all investors; therefore, Ferguson Wellman Capital Management will not necessarily implement any particular strategies discussed herein for all clients. We recommend that you discuss questions regarding your individual portfolio and investment strategies with your portfolio manager.
 
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Investment Outlook Video: Second Quarter 2012

We are pleased to present our Investment Outlook: Second Quarter 2012 video titled, "Is There Something More?" This quarter, George Hosfield, CFA , discusses the continued prospect for growth following the best first quarter for stocks since 1998. In addition, our healthcare analyst, Jason Norris, CFA , presents a brief companion video called, "A Closer Look at Healthcare," that examines the possible outcomes of the Supreme Court's ruling on the Patient Protection and Affordable Care Act of 2010.

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

To view our companion video on healthcare, please click here or on the image below.

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