Seasons

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Jason Norris of Ferguson Wellman

by Jason Norris, CFA
Executive Vice President of Research

Seasons

The more things change, the more they stay the same. Five months ago, we rebuked the old Wall Street adage of “sell in May and go away” which, through the end of August, was a good call. From May 1st to Aug 31st, the S&P 500 was up just over 7 percent. However, just like clockwork, the month of September looks to be producing the same results it historically has. Since 1928, September is the only month out of the twelve that has an average negative return. With only a couple of trading days left, it looks like that trend will not be “bucked” this year. Even though there is still time to pull even, the end of the month is usually the weakest (see below).

SP 500 Seasonality

Source: Renaissance Macro Research

Send for the Man

While this has been a bad week for stocks, it was also not a good week for healthcare mergers and acquisitions. On Monday afternoon, U.S. Treasury Secretary Jack Lew issued some administrative rules making it harder for U.S. companies to start inversion mergers. This type of merger allows a U.S. company to buy a smaller foreign company and relocate offshore to lower tax jurisdictions (see an earlier post for details). Most of these deals are centered in the healthcare space and while these changes will not stop potential inversions, they are designed to make them more difficult. For example, Medtronic is currently in talks to purchase Covidian (based in Ireland) and would use a meaningful amount of offshore cash to finance the deal. With these new rules, Medtronic would not have access to that cash without paying U.S. taxes. Therefore, they will have to look for other financing means, most likely debt, thus slightly increasing the cost. We still believe the deal will be completed, but it does show that the U.S. Treasury is adamant about changing this part of the U.S. tax code. AbbVie and Shire may also be affected; however, the tax benefits are not as meaningful and the gains from the Shire pipeline are significant enough to proceed.

Lesson Learned

Last week was not a good week for Apple. After announcing a record weekend of sales for the iPhone6 and iPhone6+ with over 10 million handsets sold (and this without shipping any to China), any good financial news was eclipsed by issues with the iPhone6+ bending and a botched iOS update. Investors didn’t have patience for the stock during the last few days. We believe that despite these hiccups, this iPhone launch will net over 60 million units this month, and based on pricing and component costs, should be accretive to gross margins.

What we know

  • The trend of September probably won’t be broken and stocks will give back some of their summer gains
  • Both buy and sell side analysts have been on the phone with their tax attorneys due to Secretary Jack Lew’s administrative order regarding inversions

Disclosures

Ferguson Wellman Named a Leader in Corporate Philanthropy

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PORTLAND, Ore. – September 23, 2014 – Ferguson Wellman Capital Management has been named by the Portland Business Journal as a leader in corporate philanthropy in Oregon and southwest Washington.

Ferguson Wellman was ranked eighth in the medium-sized companies category at the Business Journal’s annual Corporate Philanthropy Awards luncheon. Company submission to the process included number of employees, amount of dollars contributed and number of volunteer hours completed in 2013.

“This is an honor and recognition shared by everyone in our firm. It is gratifying to join other like-minded companies that make this city a better place to live and work,” said Jim Rudd, principal and chief executive officer.

Founded in 1975, Ferguson Wellman Capital Management is a privately owned registered investment advisor, headquartered in the Pacific Northwest. With more than 670 clients in 35 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 6/30/14)

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Onward and Upward

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by Shawn Narancich, CFA
Executive Vice President of Research

Investors attempted to divine the future of U.S. monetary policy following this week’s Fed meeting and watched with wide eyes as Alibaba became the largest ever U.S. IPO. For investment bankers underwriting shares of Alibaba, the timing of this $22 billion offering couldn’t have been better as U.S. stocks remain well bid amidst record levels of corporate profits and low inflation. Do record levels for U.S. stock prices and a feeding frenzy for the newly traded shares of Alibaba (trading up 36 percent in its debut) indicate speculation and excess, or is the S&P 500 at over 2,000 simply a marker on the path to further gains? Judging by the amount of retail investor cash on the sidelines and what appears to be an accelerating rate of economic growth domestically, we believe that equity valuations are reasonable. Our call is for stocks to track rising earnings and outperform bonds as the Fed pares its program of QE and ultimately starts raising interest rates next year.

Fed Semantics

All of which brings us to the details surrounding Yellen & Co.’s Fed meeting this week. Investors expected QE to be trimmed again, but the question for many investors surrounded the language with which Yellen would describe the timeframe between QE termination and the onset of rate increases. Juxtaposed against another benign inflation reading reported earlier this week (1.7 percent on the CPI), considerable time was retained as the Fed’s operative phrase. And why not? Commodity prices are dropping thanks to the stronger dollar and weaker growth from China, while unit labor costs are well contained at +2 percent. Recognizing that the Fed operates under a dual mandate to limit inflation to 2 percent and promote full employment, the error of estimate seems to be lower in deciding how fast the Fed raises interest rates, acknowledging that the 6.1 percent level of unemployment most likely overstates the degree of labor market tightness because labor force participation is so low. So is the market for Fed Funds futures correct in undershooting the FOMC committee’s collective prediction that short-term rates will rise to 1 3/8 percent by the end of next year? Only time will tell, but we believe that the Fed remains dependent on the tenor of incoming economic data to determine how fast rates will normalize.

Approaching Quarter End

With the Fed meeting behind us, a spattering of odd lot earnings reports this week from the disparate ranks of Fed Ex (good numbers, stock up), General Mills (bad numbers, stock down), and Oracle (disappointing numbers, stock down) has investors beginning to consider what could become of the next earnings parade that will start in just a few short weeks. We see puts and takes. Inasmuch as the U.S. economy is outperforming other regions at the same time the trade-weighted dollar has surged, U.S.-centric companies stand a better chance of meeting and/or exceeding estimates. In contrast, larger multi-nationals could struggle with currency translation and economic headwinds from a moribund European economy and slowing growth in China.

Our Takeaways from the Week

  • Stocks remain well bid as investors come to grips with the prospects for Fed tightening next year
  • Third quarter earnings season is right around the corner amidst currency headwinds for multi-national corporations

Disclosures

Independence for Scotland and a UK haggis famine

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Furgeson Wellman

by Brad Houle, CFA
Executive Vice President

Haggis is a cuisine of Scotland characterized by Wikipedia as a savory pudding containing sheep’s pluck (heart, liver and lungs) minced with onion, oatmeal, suet, spices and salt mixed with stock. It is traditionally encased in the animal’s stomach and simmered for approximately three hours.

The often lampooned delicacy was featured in the 1993 film, “So I Married an Axe Murder,” staring Mike Meyers. In the comedy, Mike Meyers’ character of Scottish decent when as asked about his fondness for haggis responded, “I think it’s repellent in every way. In fact, I think most Scottish cuisine is based on a dare.”

On September 18, a referendum for Scottish independence from the United Kingdom will be put to a vote. Recently, polls suggest that it will be a close outcome. This situation is creating uncertainty and we have seen the pound sterling weaken as a result. At stake is revenue from the oil-rich North Sea which has been greater than 2 percent of the UK’s revenues down from over 6 percent of revenue in the 1980s. The North Sea fields are off the coast of Scotland and there is some question about which country would control the revenue after a split. There have been many comparisons of an independent Scotland and Norway based on the countries similar populations and potential energy wealth. While the North Sea fields are in a period of declining production, the revenue would be material to an independent Scotland.

If a vote for independence passes, the UK’s fragile recovery from the financial crisis will be called into question. The UK economy has slowly been crawling out of the economic downturn of the Great Recession in a similar fashion to the U.S. A split-off of Scotland would potentially stall the recovery.

The pending referendum has also created uncertainty relative to business investments in that there is a question about the political landscape should a split occur. In a similar situation, Quebec had a referendum for independence in 1995 that failed. However, the uncertainty that it could occur again was at least partly responsible for an economic malaise in the province and reduced business investment.

In Spain, the region of Catalonia has a referendum in November of 2014 for possible secession.  The impact of this would be negative for Spain as its economy is in far worse shape than the U.S. and the UK.

While not a catastrophe in the making, an independent Scotland or Catalonia destabilizes what is a tenuous recovery in Europe. Most of Continental Europe is suffering from anemic growth, continued high unemployment, massive indebtedness and the specter of deflation.  Above all, the financial markets hate uncertainty and these types of changes are potentially disruptive to the European recovery.

Other Takeaways for the Week

  • Apple introduced the iPhone 6, Apple Watch and Apple Pay this week, which were generally well received. The Apple Pay secure transaction using an iPhone rather than a physical credit card has the potential to revolutionize how items are paid for at retailers.
  • The late Joan Rivers often used humor regarding her financial life as part of her act. One memorable quote that bears mentioning is, “People say that money is not the key to happiness, but I always figured if you have enough money, you can have a key made.”

Disclosures