Seasons of Change

Seasons of Change

After an unusually long spell of low volatility, stocks and bonds sold off in tandem to end a week that was previously on the quiet side following the Labor Day holiday. Coming into Friday, stocks had essentially earned out the high single-digit returns we foresaw for 2016. Low levels of economic growth globally should renew profit growth in future quarters, but neither stocks nor bonds are cheap at this point. 

Cole Quoted in The Oregonian

Cole Quoted in The Oregonian

Judith and Cliff Allen have owned the modest Marcus Apartments in Portland's Irvington neighborhood since 1979. They personally know their 10 tenants, many of whom have lived there long-term and pay rents that these days are below the market rate. The building is 50 years old, but the renters like having hands-on landlords, said the Allens, who live in Clackamas County.

Happy New Year (?)

Happy New Year (?)

As we observe U.S. stocks down roughly 5 percent in the first week of 2016, we are reminded of what occurred last fall when Chinese growth concerns and a strong dollar reverberated around the globe. While China accounts for only

Monster Mash

Ralph-00338_cmykby Ralph Cole, CFAExecutive Vice President of Research

Monster Mash

No holiday better describes earnings season than Halloween.  When companies announce earnings, investors are hoping for treats but often times end up getting tricks. In our view, improving corporate earnings are the catalyst to improving stock market returns in the coming year. As we close out the best month for the stock market since 2011, we should review some of the tricks and treats of earnings season.


Apple reported earnings earlier this week and beat expectations on almost every level. IPhone sales continue to grow at a robust pace around the world. The company sold 48 million iPhones in the third quarter, up 22 percent from last year. Analysts expect the company to sell 79 million iPhones in the final quarter of the year.  Average selling prices of the phones continue to rise, which enhances profitability and will lead to $60 billion in free cash flow this year alone.


As expected, the energy sector has had a rough time of it this earnings season. Earnings for the S&P 500 energy sector were expected to be down 73 percent this quarter and that indeed has been the case. During these distressing times all companies begin to dramatically scale back investment and reduce headcount. We feel that higher quality companies with good assets, low debt levels and quality management teams will benefit from the eventual rise in oil prices.

Trick and Treat

In no place is the bifurcations of earnings season more evident than in footwear. Nike reported earnings that beat analyst estimates by 12 percent and the stock responded with a nine percent pop the next day. Nike also reported a solid outlook for the coming quarters as well. Sketchers, on the other hand, tricked investors and missed earnings by a whopping 21 percent last week and the stock dropped 31.5 percent with the news.

Why have stocks responded so positively to a mixed earnings environment? Expectations for third quarter earnings had been lowered so much that companies have been able to meet and often beat those reduced forecasts. Also, the much advertised slowdown in China has not had as big of an impact on earnings as investors feared. While the investment slowdown in China has hurt some industrial companies, the Chinese consumer has actually helped the likes of both Apple and Nike.

Takeaways for the week

  • There have been more treats than tricks this earnings season which has driven the S&P 500 higher by nine percent this month
  • Earnings season continues to be very volatile and stock selection has been key


A Light in the Black

by Jason Norris, CFAExecutive Vice President of Research

A Light in the Black

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

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

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

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

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

Source: FactSet

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

Our Takeaways for the Week

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


Keep Calm and Carry On

Shawn-00397_cmykby Shawn Narancich, CFAExecutive Vice President of Research

Feeling Violated

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

Timing is Everything

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

Reasons For Optimism

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

Ringin’ the Till

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

Our Takeaways from the Week

  • A sell-off in global equities pierced the veil of U.S. market tranquility
  • Retailers concluded second quarter earnings season by reporting mixed results


Supreme Summer

Shawn-00397_cmykby Shawn Narancich, CFAExecutive Vice President of Research

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

Gathering Pace

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

Greece Ad Nauseum

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

Our Takeaways from the Week

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

Stuck With You

by Ralph Cole, CFA Executive Vice President of Research

Stuck With You

We all know too much of a good thing is no longer a good thing: that has been the case with interest rates in recent years. Coming out of the financial crisis, banks needed lower interest rates so they could repair their battered balance sheets. Short-term rates came down even faster than long-term rates and allowed banks to pay virtually nothing on deposits and make loans at a substantial profit. As long-term rates have come down, banks have had to lower what they charge for loans, thus reducing their profit margins (otherwise known as net interest margins). For the last couple of years, banks have been hoping for higher rates. Thus far this quarter they have received their wish and we can see that regional bank stock prices have responded well.


Source: FactSet

The correlation between U.S. 10-year Treasury yields and the regional bank index has been remarkable. The theory is that as long-term rates rise banks will be able to charge more for the loans than they make. They will also get higher returns on bond investments that they offer. These improved profit margins will help bank earnings. Much like the relationship between oil and gasoline prices at the pump, banks will be slow to raise interest on deposits and much quicker to increase what they charge on loans. We expect rates to continue to move higher throughout the rest of the year.

Every Little Thing Is Going to be Alright

In a year when the Fed is expected to raise interest rates every piece of economic data is parsed and picked apart. This week it was retail sales and consumer comfort. Retail sales were strong, whereas consumer comfort came in weaker than expected … So let’s just step back for a moment.

Employment gains have resumed their 200,000+ trajectory from 2014. Wage growth is finally starting to flow through the economy. Consumers and corporations continue to benefit from generationally low interest rates. We believe the consumer and the economy are on solid footing and that bodes well for whenever the Fed starts raising rates - be it June, September or December. We caution all not to worry too much about the daily economic numbers or the daily movements in the stock market.

 Takeaways for the week:

  • Banks are a beneficiary of higher long-term interest rates
  • "Main Street" is finally feeling the positive effects of this economic expansion


You're Hired!

Shawn-00397_cmykby Shawn Narancich, CFAExecutive Vice President of Research

Green Shoots

 A week chocked full of economic insight concluded with a bang, as a strong jobs report for the month of May provided more assurance to investors that a contraction in first quarter GDP is likely to be transitory. The U.S. economy created a net 280,000 nonfarm jobs last month, nearly a third better than what Wall Street was expecting. Good news on the jobs front was widespread among various industries and accompanied by more evidence that wage gains are firming. After being hamstrung by the West Coast ports strike, an exceedingly strong dollar and another harsh conclusion to winter, the U.S. economy now appears to be gathering speed.

In its attempt to determine the right time to begin raising interest rates, the Fed will triangulate today’s bullish job report with additional evidence of gathering momentum in manufacturing released earlier this week, that coming in the form of an ISM report showing that activity has picked up for the first time since last fall. As well, construction spending perked up in April and previous months’ activity was revised upward. Finally, Yellen & Co. would observe that U.S. light vehicle sales posted another strong number in May, rising to a seasonally adjusted annual rate of 17.8 million vehicles sold, a 10-year high. The plurality of this week’s data reveals an economy no longer in need of unconventional monetary policy and leads us to believe that the Fed will achieve lift-off from zero interest rate policy this fall, most likely in September.

Raise Rates in 2015 … Mais Non?

As investors were digesting the good news domestically, the International Monetary Fund was busy revising down its estimate of how fast the U.S. economy will grow this year. In an unusual move, Managing Director Christine Lagarde urged the Fed to hold off on raising rates this year, arguing that doing so would lead to an even stronger dollar and threaten the rate of expansion globally. The French may be opinionated, but even her admonition is likely to fall on deaf ears. We have said repeatedly that when the Fed raises rates, it will be for the right reasons, and the data we are beginning to see affirm for us that the U.S. economy is rebounding in the second quarter. Like last year, we see a second quarter reversal carrying through with strength into the second half of 2015.

Markets on the Move

Although the IMF might not be convinced, bond investors have responded in dramatic fashion, selling longer dated issues in mass and sending benchmark U.S. rates to their highest levels of the year. Equities in the financial sector are doing the opposite, rallying in anticipating of higher rates boosting banks’ net interest margins. In anticipation of rising rates, we recently increased our weighting to financials, while further trimming our exposure to a consumer discretionary sector that appears closer to full value.

Our Takeaways from the Week

  •  The U.S. economy appears to be perking up, solidifying expectations for Fed action later this year
  •  The bond market is responding, with rates rising to their highest levels of the year



Belaboring Labor

Shawn-00397_cmykby Shawn Narancich, CFAExecutive Vice President of Research

Working for a Living

Investors unnerved by disappointing economic data of late breathed a sigh of relief with the April jobs report, which showed that nonfarm payrolls rebounded to a monthly rate of 223,000 last month. Unemployment dropped again and now stands at 5.4 percent, a rate not too far from the Fed’s definition of the full employment rate of unemployment (somewhere just north of 5 percent.) A “goldilocks” report of sorts that’s neither too hot nor too cold, the April payroll release supports the notion that the Yellen & Co. will likely begin the rate tightening process this fall. As policymakers and investors debate how tight labor markets actually are against a backdrop where the labor force participation rate hovers near its lowest level since the late 1970s, we are increasingly attuned to reported wage rates and the broader employment cost index (ECI). While wage gains remain muted at 2.2 percent in April, the ECI of 2.6 percent released last week demonstrated a notable uptick. When juxtaposed against anecdotal evidence of wage gains at fast food restaurants and retailers, our best guess is that the worm has turned with regard to employment costs this cycle. Because labor accounts for the predominant cost of doing business, the near-zero inflation rates we’ve seen of late appear likely to begin rising. When combined with the recent rebound in oil prices, headline inflation probably rises closer to the Fed’s 2 percent target by year-end.

Spring Forward

In contrast to the encouraging labor report, investors were greeted by a report showing that productivity of the U.S. labor force declined for the second consecutive quarter. While somewhat obscure, the statistic shines a light on the U.S. economy’s weak start to the year. By marrying employment and output statistics, the report tells us that the U.S. economy produced less per each hour worked in the first quarter. The reason productivity is such an important statistic is because when it’s combined with employment costs, it generates what we call unit labor costs. As alluded to above, sustained increases in the cost of labor are a key signpost for inflation, particularly when they translate into rising costs of production on a per unit basis. Just as importantly, unit labor costs determine how profitable companies are and the overall standard of living enjoyed by workers. Another tough winter combined with disruptions from the west coast ports strike put a damper on the U.S. economy in the first quarter, but we believe that an improving labor market, rising disposable incomes, and higher capital spending will engender a rebound of sorts in the second quarter. Commensurately, we would expect productivity to return to positive territory.

Exceeding Expectations

First quarter earnings season is just about finished and, once again, U.S. companies have done a remarkable job of under promising and over delivering.  Compared with expectations of a low single-digit decline in first quarter profits, corporate America is instead delivering earnings that should end up being marginally above levels of a year ago. In particular, while dramatically lower oil prices caused red ink to flow on the income statements of many energy companies, the damage was ameliorated by better downstream refining and marketing results and the quick pace with which oil and gas producers have right-sized their cost structure.

Our Takeaways from the Week

  • A solid April employment report bodes well for better economic times ahead
  • Another encouraging earnings season is just about finished






Mastering Expectations

Shawn-00397_cmykby Shawn Narancich, CFAExecutive Vice President of Research

 A Tradition Unlike Any Other

 As another Masters golf tourney gets underway in Augusta, Georgia this week, investors are beginning to process the first reports of a dawning earnings season; as well, they have been jolted by a strong dose of deal news this week totaling well over $100 billion in announced acquisitions. Whether this flurry of activity heralds meaningfully more late-cycle deal making remains to be seen, but low interest rates as well as low oil prices support the rationale for energy deals like Royal Dutch’s $70 billion purchase of British energy company BG Group. Speculation is rife that rivals Exxon and Chevron could be compelled to do the same. Although buying another European producer might make more sense now in light of the strong dollar, we view neither of these integrated oil producers as likely to attempt a large deal for a major peer. More likely are deals for smaller independent U.S. producers with quality acreage in key Texas shale plays like the Permian Basin and the Eagle Ford.

Ready, Fire, Aim

As Royal Dutch jockeys for position in Big Oil, energy investors attempting to divine the low in prices for this cycle were forced to confront the not-so-shocking news out of Iran that that their “supreme leader” Khamenei is calling for the immediate lifting of economic sanctions in return for concessions limiting the country’s nuclear program. As well, he apparently disdains the idea of nuclear inspections that would confirm the country’s compliance with key provisions of the agreement reached in Switzerland last week. All of which leads us to conclude that predictions about a wave of new Iranian oil buffeting the markets any time soon is premature. From our perspective, the likelihood of reaching a final nuclear agreement with Iran looks increasingly unlikely.

Skating to Where the Puck Will Be

Geopolitics aside, we believe oil prices have bottomed and that markets will tighten meaningfully in the second half of this year, pushing prices closer to the marginal cost of production estimated to be somewhere between $75 and $100/barrel. From an investment perspective, we are overweight the energy sector and favor upstream producers and the service companies that enable their production as the two groups most likely to benefit from rising oil prices.

And They’re Off!

Alcoa marked the unofficial beginning of first quarter reporting season by announcing better-than-expected earnings on healthy growth in aluminum demand from both the aerospace sector as well as the emerging market in autos. Unfortunately for shareholders, the results met with a thud by investors who drove the stock down 3 percent on fears that aluminum prices will succumb to excess supply from China, the world’s largest producer. Next week will mark the first full week of earnings, with the money center banks and a few select industrial and healthcare companies on tap to deliver their numbers. In contrast to depressed energy results amid low oil prices, we expect earnings growth from sectors like healthcare and technology.

Our Takeaways from the Week

  • Deal making is being stimulated by low oil prices, low interest rates and a strong dollar
  • Investors are beginning to turn their attention to first quarter earnings


Come Together

by Ralph Cole, CFA Executive Vice President of Research

Late last year we had a great chart that showed the Fed’s own expectations for tightening were ahead of the markets’ expectations for Fed tightening. We explained that as those two outlooks moved toward one another there would be volatility. On this past Wednesday, we experienced the positive aspect of that volatility.

Fed officials concluded two days of meetings in Washington and issued a statement regarding the economy and interest rates. While many were focused on the language used by the Fed, we were more focused on the Fed governors’ expectations for short-term interest rates in the coming year and the lowering of the theoretical “full employment rate”.

As part of Federal Open Market Committee (FOMC) meetings, each of the Fed Governors plots what they expect the Fed Funds rate to be at the end of 2015, 2016 and 2017. This chart has been referred to as “The Dot Chart”. The median expectations of the governors for Fed Funds at the end of 2015 actually came down from 1.125 percent to .625 percent. This means that the Fed Governors still expect to raise rates in 2015 (which we expect as well), but just not as quickly as they previously expected. This is more in line with what the market was hoping for; thus it was met with both a stock and bond market rally.

Untold Stories

Unemployment has been one of the most controversial topics of this economic expansion. The unemployment rate steadily moved down from 10 percent in 2009 to 5.5 percent in February. This rapid decline stood at odds with what many people felt they were experiencing in their own lives, and what was anecdotally highlighted in the media as well. What makes this more than a theoretical conversation is the unemployment rate’s effect on wages.

The most recent Federal Reserve study on employment came to the conclusion that the “full employment rate” for the U.S. economy was approximately 5.4 percent. The belief being that at 5.4 percent unemployment wages would start to rise or even accelerate. In the Fed’s statement today, they lowered the theoretical full employment rate for the United States to between 5.0 percent and 5.2 percent. Because we have not seen wages increase up to this point, they concluded that a lower level of employment would be needed to begin to pressure wages higher. This conclusion fits perfectly with the expectations of Fed Governors that the Fed Funds rate would not be increasing as much as previously expected. One company of note is Target, which announced this Thursday that they would be increasing wages for employees to at least $9/hour in April.

Takeaways for the Week:

  • The Fed continues to signal that they will be raising rates later this year, but at a pace that agrees with the markets’ assessment of our economic situation
  • Future Fed meetings and communications will cause increased volatility in the market


One Thing Leads to Another

Shawn-00397_cmykby Shawn Narancich, CFAExecutive Vice President of Research

Too Much of a Good Thing?

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

Bidding Adieu to ZIRP

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

Skate to Where the Puck Will Be

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

Always Darkest Before the Dawn

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

Our Takeaways from the Week

  • Increasingly heady dollar gains are beginning to negatively impact U.S. stock prices
  • The most recent declines in oil appear long in the tooth

Back in Time

by Jason Norris, CFA Executive Vice President of Research

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

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

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

You Keep Me Hangin' On

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

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

Our Takeaways for the Week: 

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


Take Your Time

by Ralph Cole, CFA Executive Vice President of Research

Take Your Time

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

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

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

Waiting on a Friend (Fed)

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

Takeaways for the Week:

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

1 Source: Bloomberg


2015 Investment Outlook Video: Riding the Global Liquidity Peloton

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

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

Intro slide
Intro slide

Fourth Quarter 2014 Investment Outlook Video: Not Too Hot, Not Too Cold

We are pleased to present our Investment Outlook: Fourth Quarter 2014 video titled, "Not Too Hot, Not Too Cold." This quarter, Chief Investment Officer George Hosfield, CFA, addresses the factors contributing to recent market volatility and what that means for our outlook going forward.

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


Jason Norris Discusses Microsoft Restructuring on KGW

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

Four More Professionals Receive Five Star Wealth Manager Designation

PORTLAND, Ore. – June 3, 2014 – For the fourth consecutive year, several Ferguson Wellman portfolio managers have been recognized as Five Star Wealth Managers by Portland Monthly magazine. Nathan Ayotte, CFP®, Ralph Cole, CFA, Helena Lankton and Jason Norris, CFA, were among the professionals honored. This adds to others in our firm who have been listed as Five Star Wealth Managers, including Dean Dordevic, Lori Flexer, CFA, Marc Fovinci, CFA, Steve Holwerda, CFA, George Hosfield, CFA, Mark Kralj, and Jim Rudd. The Five Star Wealth Manager distinction is a select award recognizing wealth managers that provide quality services to clients, with approximately 13 percent of the wealth managers in the greater Portland area earning this designation.

“We are very pleased that so many of our portfolio managers have been recognized by Portland Monthly and Five Star Professionals for this award,” said Jim Rudd, principal and chief executive officer. “This honor speaks to the investment expertise and experience these professionals bring to our clients.”

The Five Star Wealth Manager designation is based upon 10 objective eligibility and evaluation criteria, ranging from credentials to regulatory history to client retention, that are associated with wealth managers who provide quality service to their candidates. Candidates with “an established practice, good client relationships and a strong reputation” are nominated by peers and firms and verified against the criteria (source: Five Star Wealth Manager Award Program Summary and Research Methodology).

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


The Five Star Wealth Manager award, administered by Crescendo Business Services, LLC (dba Five Star Professional), is based on 10 objective criteria: 1. Credentialed as a registered investment adviser or a registered investment adviser representative; 2. Active as a credentialed professional in the financial services industry for a minimum of 5 years; 3. Favorable regulatory and complaint history review (As defined by Five Star Professional, the wealth manager has not: A. Been subject to a regulatory action that resulted in a license being suspended or revoked, or payment of a fine; B. Had more than a total of three customer complaints filed against them [settled or pending] with any regulatory authority or Five Star Professional’s consumer complaint process; C. Individually contributed to a financial settlement of a customer complaint filed with a regulatory authority; D. Filed for personal bankruptcy; E. Been convicted of a felony); 4. Fulfilled their firm review based on internal standards; 5. Accepting new clients; 6. One-year client retention rate; 7. Five-year client retention rate; 8. Non-institutional discretionary and/or non-discretionary client assets administered; 9. Number of client households served; 10. Educational and professional designations. Wealth managers do not pay a fee to be considered or awarded. Once awarded, wealth managers may purchase additional profile ad space or promotional products. The award methodology does not evaluate the quality of services provided and is not indicative of the winner’s future performance. 1,558 Portland wealth managers were considered for the award; 190 (13 percent of candidates) were named Five Star Wealth Managers.

Investment Outlook Video: Second Quarter 2014

We are pleased to present our Investment Outlook: Second Quarter 2014 video titled, "Spring Thaw". This quarter, Chief Investment Officer George Hosfield, CFA, discusses how the weather impacted the economy and what we believe that means for the continued recovery.

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

jpeg of Q2 2014 video
jpeg of Q2 2014 video