Time of the Season


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Jason Norris of Ferguson Wellman

by Jason Norris, CFA
Executive Vice President of Research

Here Comes the Sun

The polar vortex of 2014 seems to have finally thawed and we believe this change in the weather will bring some warmth to the U.S. economy. Economic growth hit a speed bump in the first quarter as much of the U.S. experienced severe winter conditions. This resulted in lower-than-expected economic activity, which in turn led investors to reduce risk in their portfolios and bid up bonds, leading to a decline in interest rates. We believe the “soft patch” is a short-term phenomenon and we have already started to see a pick-up in retail sales and industrial production, as seen in the Purchasing Managers Index (PMI).

While stock market volatility hasn’t hurt consumer confidence, the price of gas may do so in the near future. We have seen a 10 percent increase in gas prices over the last two months. Commodity prices can be volatile, but if this is a persistent trend higher, it will present an impediment to our bullish view of the U.S. consumer.

Send Me Your Money

April 15 has come and gone, bringing increased revenues to the Treasury. 2013 showed high single digit “revenue” growth for the Treasury. On the expenditure side of the ledger we are seeing lower-than-anticipated spending on healthcare and defense. Both of these instances should lead to lower deficits. While the U.S. is still spending more than it takes in, we are pleased that difference is declining. For those tax payers who have a big heart and want to make a difference, the IRS includes a box on tax forms for filers to check if they want to make a donation to the Treasury. Remember that tax rates are just a minimum requirement – you may always pay more. Over the last 15 years the average annual donation has been around $2 million; however, 2014 has already eclipsed this amount with $2.7 million in donations. Considering the strength in equity markets the last few years, will there be more “giving” to the U.S. government… or will increased capital gains taxes eat into this potential philanthropy?

Back in Business

April kicks off the first quarter earnings season for 2014 and this week we saw two bellwether semiconductor companies report, Intel and Linear Technology. The results were mixed, with Intel citing a pick-up in the P.C. space and Linear seeing strength in automobile and industrial markets. Both companies showed average revenue growth but profit margins continue to remain high.

Overall, expectations for the first quarter are for an earnings growth of three percent (year-over-year). This is down from expectations of 10 percent growth three months ago. We believe this negative revision is a result of the inclement weather in the first quarter. We expect second quarter growth to reaccelerate to nine percent. That may prove to be somewhat optimistic, but we believe we will see greater than five percent growth in the second quarter.

Our Takeaways from the Week:

  • As we move into spring, we would expect U.S. economic growth to continue to pick up
  • We would use the recent strength in the bond market as an indication to reduce exposure and move those funds to U.S. equities


Mark Kralj and Emily Kralj Highlighted in OSU Business School Magazine


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In a recent article in The Exchange, the magazine of Oregon State University College of Business, we enjoyed seeing the Kralj family featured. Mark Kralj, principal, and his daughter, Emily Kralj, shared their experiences with Oregon State and the institution’s impact on their family and work.

“Mark has a long and distinguished career of service and philanthropy to the entire university, in addition to the College of Business. We are very proud of Mark for his contributions to Oregon State University,” said Jim Rudd, principal and chief executive officer of Ferguson Wellman.

A Business Beaver Colony

The apple doesn’t fall far from the tree. Cut from the same cloth. Two peas in a pod. Just don’t tell lifelong Beaver Believers Mark Kralj (’77) and his daughter Emily Kralj (’09) that they are two birds of a feather.

While it wasn’t necessarily Emily’s plan to follow in her father’s footsteps, the duo’s parallel education and career paths have led them to the same building where Mark is a Principal at Ferguson Wellman Capital Management, and four floors below him Emily is a Senior Staff Accountant at Geffen Mesher & Company.

The Kralj family’s roots run deep at Oregon State, so it’s no surprise that Mark and Emily both found themselves here. Mark’s two older sisters went to Oregon State; so when it came time for him to choose a college, there was no other option. And while Emily considered going to college out east, the small-town feel and familiarity of Oregon State won in the end. Emily was indoctrinated into the Beaver lifestyle at a young age, growing up going to football games.

“I remember watching Oregon State beat #1 USC when I was 12 or 13,” she recalled, “and everyone rushed on to the field, and I was like, “I want to do that! That looks like so much fun!”

Neither Mark nor Emily came to Oregon State to study business, but it was the College of Business faculty that heavily inspired, influenced and changed the direction of both their career paths. Mark started out studying forestry, and while minoring in business he took his first accounting class with Professor Mary Ellen Phillips.

“I had never considered accounting,” said Mark, “but in taking that class as part of my minor, I realized it was my calling.” Little did he know at the time, but history would repeat itself 33 years later.

Emily started out majoring in engineering, and when she realized it wasn’t a good fit, she took her first accounting class with Professor Amy Bourne. Again, it was in this first introduction to accounting that Emily found her true passion and shifted her studies to business.

If measured by Mark and Emily’s success, one can safely say the switch in majors was a wise decision.

Mark has been with Ferguson Wellman for 24 years, and has been instrumental in growing the company’s assets from $380 million to $3.75 billion in that time. He also remains heavily involved in giving back – among numerous volunteer positions, including as an OSU trustee.

“I can’t really say enough about the good things that have occurred in my life because of Oregon State, and because of that I’m thrilled to be a part of the foundation, and to be there to create opportunities for the students of today,” Mark said.

Emily has been with Geffen Mesher & Company since she graduated in 2009, and focuses on tax accounting and business consulting. Wholeheartedly agreeing with her dad’s sentiments, Emily appreciates the role Oregon State has played for her family. “I don’t think our family would have gotten to where we are without Oregon State,” she said, “because it’s always been such a foundation.”

Growth, Gas and Golf


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by Shawn Narancich, CFA
Executive Vice President of Research

Suspended Animation

 Despite an improving job market and a spring thaw that appears to be lifting the economy out of its winter doldrums, U.S. equity investors felt the chill of a sell-off that left benchmark stock indices underwater for the year. Confronted by the dawning reality that the Fed’s ultra-accommodative monetary policy is going away and, by implication, that projected inflation premiums are rising, high-flying tech stocks like Facebook, Twitter, and Amazon have been particularly hard hit. In contrast, amid a bond market rally that few foresaw at the start of the year, interest-sensitive stocks within the utility sector and REIT space have performed quite well. In general, value stocks are outperforming growth and, from out of the blue, emerging market stocks have begun to excel. Despite the distinct possibility that tighter monetary policy in countries like Brazil, South Africa and India could push these economies into recession, the markets of these BRICS constituents have rallied recently. For our part, we expect waning fiscal headwinds and a renewal of fortunes in the energy and manufacturing sectors to produce faster U.S. economic growth as the year progresses.

Shoulder Season

With the dawn of April, U.S. natural gas markets have officially transitioned from heating season to what is known as “injection season.” Commonly, the clean burning commodity falls in price this time of year as cold weather wanes and heating demand disappears (often referred to as “shoulder season”), allowing natural gas producers to start injecting gas into underground storage caverns in preparation for next winter. Front-month gas prices are down from the $6.00/Mcf level reached in February, but prices have been notably firm around the $4.50 level recently, and are much higher than the $2.00 lows reached in 2012. Prices have risen because of demand growth from utilities using more gas to generate electricity, but more immediately because of an unusually cold winter that has depleted storage inventories to 10-year lows. Surprisingly, a more than doubling of gas prices has happened without a lot of fanfare, as gas bears beat the drum of supply response from “gas behind pipes.”

Gas Bulls

The key question now is whether a domestic energy industry more focused on drilling for shale oil will be able to replenish gas supplies in time for the next heating season. At current prices, count us as skeptics. Natural gas directed drilling is at the lowest level since 1992, and while associated gas from oil directed drilling has provided a key source of supply, we doubt it will be enough to adequately refill depleted storage caverns. The reality is that curtailed gas flow doesn’t exist on any meaningful scale, and with the typical shale oil project still much more profitable for producers, we don’t expect adequate gas drilling to materialize until futures prices reach the $5.00-to-$5.50 level. Because of the substantial lead times necessary to transport drilling rigs and hydraulic fracturing equipment from oil to gas basins, combined with the time it takes to actually drill and complete new gas wells, the industry will not be able to turn on a dime. As a result, price spikes could occur until adequate new supplies materialize.

A Tradition Unlike Any Other

As the world’s best tee it up at Augusta National this week, money managers are gearing up for a pursuit of their own, less affectionately known as earnings season. Aluminum producer Alcoa kicked things off in acceptable fashion earlier this week and, following early reports from Wells Fargo and JP Morgan, reporting starts to kick into a higher gear next week.

Our Takeaways from the Week

  •  Stocks have retreated from recent highs despite generally improving economic data
  • Depleted supplies and healthy demand growth appear to have ended the bear market in natural gas


Be Careful What You Say


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Furgeson Wellman

by Brad Houle, CFA
Executive Vice President

Flash Boys

High-frequency trading” (HFT) was a huge media topic this week due to author Michael Lewis’ appearance on last weekend’s “60 Minutes” as part of his promotion of his latest book titled Flash Boys. What captured media attention was his claim that the stock market was a “rigged game.” This statement was based upon his research for Flash Boys that detailed the impact of high-frequency trading on the stock market. HFT is a very complex trading strategy that relies on computers to trade at lightning speed to make a small amount of money on a huge volume of trades. In fact, it is theorized that 30 to 50 percent of the current stock exchange volume is HFT.

High-frequency trading is an extremely complex issue that simply can’t be summarized by declaring the stock market a “rigged game.”  In most forms, HFT is not illegal. It falls into a grey area of trading. If certain investors have a speed advantage, is that unethical? It is hard to say and supporters of HFT maintain that it adds liquidity to the market and facilitates trading. However, the aspect of HFT that is not defensible is that it also allows these trading firms the ability to know what other investors are doing and trade ahead of them. This practice is called “front running” which is certainly unethical and illegal.

The issue is so broad and complex, it is very difficult to determine who is doing what, and how that is impactful to the stock market as a whole. This is not a new issue for regulators who have been looking at HFT for some time now. We think the good news is that the recent attention on the topic will result in appropriate market reforms which will benefit investors. Financial markets operate on the confidence of the participants, and anything that enhances transparency and confidence benefits all investors.

While Mr. Lewis is a great writer and entertaining storyteller, his comments are unnecessarily inflammatory and might be intended to sell books and maximize the value of a possible film adaptation.

Employment Numbers March On

Turning to the capital markets, today the March employment numbers were released with a 192,000 increase in nonfarm jobs and a slight uptick in the unemployment rate to 6.7 percent. The consensus among economists was for a 200,000 increase in jobs. Due to the late-December expiration of long-term unemployment benefits, there was an expectation that the employment numbers would be even stronger than anticipated.

Historically, when long-term unemployment benefits run out, there is a significant pickup in employment. The “whisper number” was for a gain of 250,000 or more jobs. Defined as the number economists secretly hope will be the outcome, the “whisper number” usually is not reached by consensus and therefore is rarely published as an estimate. The bottom-line is that markets perceived the March job creation as a mild disappointment which resulted in some weakness in the equity markets.

Takeaways for the Week

  • We view the current employment data to be moving in the right direction
  • We are not overly concerned with the monthly volatility of the labor statistics