S&P: 500 Shades of Profit

by Shawn Narancich, CFAExecutive Vice President of Research

S&P: 500 Shades of Profit

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

Ringing the Cash Register?

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

Glimmers of Hope in Europe

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

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

Our Takeaways from the Week

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

Disclosures

Liquid Courage

by Jason Norris, CFA Executive Vice President of Research

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

All Over the Road

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

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

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

Source: FactSet

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

Working for the Weekend

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

Our Takeaways for the Week: 

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

Disclosures

Federal Reserve Bank Basics

by Brad Houle, CFA Executive Vice President

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

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

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

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

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

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

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

 Our Takeaways for the Week:

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

Disclosures

Friends in Low Places

by Ralph Cole, CFA Executive Vice President of Research

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

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

Source: Factset

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

Golden Years

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

Takeaways for the week

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

Disclosures

New Year, New Worries

by Shawn Narancich, CFAExecutive Vice President of Research

Deja Vu

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

Banking on Profits?

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

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

Off Target

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

Our Takeaways from the Week

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

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

Disclosures

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

PORTLAND, Ore. – January 12, 2015 – Ferguson Wellman Capital Management is pleased to announce that the firm has been named by Oregon Business Magazine as a top financial planner/manager in their annual Power Book publication. Oregon Business Magazine ranked Ferguson Wellman third in the state on their list of 41 financial planning companies. The listing was created by calculating the total number of assets under management in Oregon.

“We are very flattered by this honor, but feel most satisfied that we have our clients’ confidence and trust. That is truly paramount to us,” said Jim Rudd, chief executive officer.

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

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

The January Effect

by Jason Norris, CFA Executive Vice President of Research

The January Effect

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

Don’t Chase the Hot Dot

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

Our Takeaways for the Week: 

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

*Source: Mentor

Disclosures

2015 Investment Outlook Video: Riding the Global Liquidity Peloton

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

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

Intro slide

A Glimpse Into the Continuing Greek Crisis

by Brad Houle, CFA Executive Vice President

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

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

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

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

Our Takeaways for the Week:

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

Disclosures

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

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

“Everyone at Ferguson Wellman is very gratified by our recent acknowledgement in Financial Planning. We appreciate being mentioned alongside our peers, but quite frankly what means the most to us is the trusting relationship that we continually earn with each client we serve,” said James H. Rudd, principal and chief executive officer.

Founded in 1975, Ferguson Wellman Capital Management is a privately owned registered investment adviser that serves over 700 clients with assets starting at $3 million. The firm works with individuals and institutions in 36 states with a concentration of those clients in the West. Ferguson Wellman manages $4.1 billion that comprises union and corporate retirement plans; endowments and foundations; and separately managed accounts for individuals and families. In 2013, West Bearing Investments was established, a division of Ferguson Wellman, that serves clients with assets starting at $750,000. All company information listed above reflects 12/31/14 data.

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

You Better Believe It

by Jason Norris, CFA Executive Vice President of Research

You Better Believe It

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

Somebody Get Me a Doctor

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

Spirit of the Season

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

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

Our Takeaways for the Week: 

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

Disclosures

Here Comes Santa Claus

by Ralph Cole, CFA Executive Vice President of Research

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

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

Wind of Change

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

Our Takeaways from the Week

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

Disclosures

Black Gold?

by Shawn Narancich, CFAExecutive Vice President of Research

Decoupling

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

Leading the Way

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

Crude Thoughts

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

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

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

Our Takeaways from the Week

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

Disclosures

A Pleasant Shade of Gray

by Jason Norris, CFA Executive Vice President of Research

Headline sales numbers from Black Friday looked disappointing with revenues falling 11 percent in 2014, which follows a negative year in 2013 as well. However, when we dig into the data, we see that sales have spread out over the entire week. Many stores have been starting their promotions earlier in the Thanksgiving week, meaning Black Friday is not the seminal event it once was. Coupled with an increasing amount of shoppers going online, the post-holiday shopathon is not the signal to the markets it once was.

Data from the entire weekend looked fine with sales rising approximately four percent, with a 15 percent clip coming from online sales. In forecasting the entire holiday season, industry analysts still expect low to mid-single digit growth. In light of gasoline prices down 35 percent from last year, we are comfortable with that growth forecast. In fact, this led us to increase our allocation to the consumer discretionary sector recently.

Quantitative Speaking

With the Fed wrapping up its quantitative easing last month, the European Central Bank has upped their rhetoric. This week, ECB president Mario Drahgi was more adamant that the ECB will be in the markets buying bonds. This put a small bid on the Euro; however, we are still waiting for the ECB to actually make meaningful purchases. Since 2012 when Drahgi stated the bank would do "whatever it takes" to prop up the Euro economy, there has been a lot of speaking, with little actual easing.

The economic data points coming out of Europe have been neutral at best. While the old adage of "don't fight the Fed" may be appropriate for the ECB and European equities, we would rather focus on large cap U.S. stocks due to a strong economy, falling commodity prices and low interest rates. One potential headwind for multinationals is going to be the strength of the U.S. dollar. The dollar has rallied 10 percent the past few months and this will start effecting overseas results this quarter. Due to this, recent portfolio additions have focused on the domestic economy, rather than the global economy.

Our Takeaways for the Week: 

• Falling gas prices and an improving U.S. economy keeps us bullish on U.S. stocks
• Continued dollar strengthening will benefit U.S. stocks and bonds, while pressuring commodity prices, thus keeping inflation low

Disclosures

Ferguson Wellman Capital Management Recognized as One of Portland Business Journal’s Most Admired Companies

PORTLAND, Ore. – December 4, 2014 – Ferguson Wellman Capital Management is pleased to announce that the firm has been named by the Portland Business Journal as one of the Most Admired Companies. Of the twelve financial services companies listed in the top ten (one spot was a three-way tie), the firm was ranked fifth. This is the tenth consecutive year that the company has made this exclusive list. The list is compiled by surveying over 2,600 CEOs across the state of Oregon and southwest Washington. The CEOs were asked to select three companies they most admired in eight industries. They were also asked to rate the two companies they selected in each category on the following attributes: (1) innovation (2) quality of services or products (3) community involvement and (4) quality of management and (5) branding and marketing.

“We are thrilled to have been selected, along with many other companies that we respect and admire throughout this great state,” said Steve Holwerda, CFA, chief operating officer and principal.

Founded in 1975, Ferguson Wellman Capital Management is a privately owned investment advisory firm, established in the Pacific Northwest. With more than 690 clients, the firm manages $4.1 billion in assets that comprise union and corporate retirement plans; endowments and foundations; and individuals. (as of 9/30/14)

10 Investment Themes to be Thankful For

by Brad Houle, CFA Executive Vice President

This week as we gather with friends and family to celebrate Thanksgiving we thought it appropriate to reflect upon recent investment themes for which we are thankful.

Top 10 Investment themes to be thankful for:

1. The midterm elections are over. More important than the outcome is the fact that the elections have been decided and the markets have a reprieve from the election cycle until mid-2015. However, like Christmas displays now appearing in stores prior to Halloween, the 2016 election will start to dominate the news far sooner than it needs to.
2. The Federal Reserve is more open and transparent than it has ever been in its history. As part of the Bernanke Fed, there was an attempt to be more open and transparent relative to communicating interest rate moves to the markets. This transparency has been continued with the Yellen Fed and has been effective in setting the expectations for investors as to the next moves of the Federal Reserve. This openness helps to mitigate the uncurtaining around Fed actions.
3. Unemployment is at 5.8 percent. At the end of 2009 unemployment was at nearly 10 percent. While the labor market has been painfully slow to heal, the rate jobs are being added each month means we should reach theoretical full employment sometime in 2015. Theoretical full employment is thought to be around 5.4 percent unemployment, as every person of working age cannot be employed in the economy due to a variety of reasons.
4. Oil prices have declined precipitously this year. While a decline in oil prices has been a headwind for energy stocks, it is great for U.S. consumers. When gas prices decline, it directly puts money into consumers’ pockets and should help consumer discretionary stocks.
5. The municipal bond market has extraordinarily low default rates. Despite the recent default in Detroit and Puerto Rico's widely publicized troubles, the municipal bond market defaults are exceedingly rare. According to Moody's, the default rate for the entire 43 years in which the data is available is .012 percent.
6. The Federal Reserve is expected to raise short-term interest rates sometime in 2015. This is good news because if this does indeed happen it demonstrates the strength of the U.S. economy. If the Federal Reserve is compelled to raise rates to keep the economy from overheating, it speaks volumes about the robust economic growth in the U.S.
7. The United States has a healthy level of inflation in the economy. Inflation as measured by the Consumer Price Index is running at around 1.7 percent annually. Too much inflation in an economy is damaging, such as what was experienced in the United States in the 1970s. Conversely, too little inflation can be toxic to an economy. Deflation is when inflation turns negative and prices grind lower. This can cause a negative feedback look whereby consumers and businesses delay purchases in hope of getting lower prices
8. The U.S. dollar is strong. It is said that money flows where it is treated best, and, with the robust U.S. economy, our dollar is appreciating against many foreign currencies. This will spur foreign investment in our financial markets.
9. The current economic cycle shows no signs of overheating. A question we get asked frequently is how much longer does this business cycle have to go? Economic cycles die of overheating, not old age. This has been a painfully slow economic recovery that has been around for approximately 5 years. A slow growing economic expansion with no signs of a bubble in the economy has the potential to last.
10. Corporate earnings remain strong. According to FactSet Research, of the 487 companies in the S&P 500 that have reported earnings for the third quarter of 2014, 77 percent have reported earnings above the mean estimate and 59 percent have reported sales above the mean estimate. This equated to a blended earnings growth rate of 7.9 percent for the previous year as of the end of the third quarter.

Disclosures

Easy Money

by Ralph Cole, CFA Executive Vice President of Research

The global economic expansion continues to run at very different speeds around the world. However, the common thread among most all developed economies has been easy money. Today, China joined the party by lowering interest rates for the first time since 2012. The reasons for lower rates has been stubbornly slow growth, and as long as inflation remains low, central banks can feel confident in their choice to stimulate their economies.

Markets were also buoyed this week by dovish comments out of the European Central Bank. With most European economies mired in little to no growth, and the ECB has embarked on its own version of quantitative easing (QE). Mario Draghi hinted in a speech yesterday that their asset-buying program could expand if necessary. The lack of economic growth in Europe can at least be partially explained by Draghi’s habit of speaking about, rather than actually enacting, central bank policy. In Texas, they would call this “all hat and no cattle”.

Thrift Shop

This week just about wrapped up earnings season for retail companies. Earnings were basically strong across the board for retailers from Dollar Tree and Target to Foot Locker and Best Buy. We believe retailers and consumers are starting to feel the benefits of lower prices at the gas pump. Lower gas prices often coincide with higher consumer confidence numbers, which in turn leads to increased consumer spending.

What makes the retail industry so interesting is the plethora of stores from which shoppers have to choose. I don’t think any of us would argue that we aren’t over-retailed in the U.S. This abundance is one reason we don’t see much inflation. Despite a zero percent interest rate policy and a massive expansion of the Fed’s balance sheet, inflation is not yet finding its way onto store shelves. Competition for the consumer’s discretionary dollar remains fierce. Case in point: the phenomenon of Black Friday sales moving earlier into our Thanksgiving holiday week.

Our Takeaways from the Week

• Global markets continue to respond positively to easy money policies around the world
• Lower gas prices should lead to positive sales for retailers this Holiday season
• Have a Happy Thanksgiving and travel safely

Disclosures