David Fleer
Bristlecone Value Partners, LLC
12301 Wilshire Blvd., Suite 320
Los Angeles, CA 90025 USA
Work 1-877-806-4141

Risk-Off, Risk-On

April 26th, 2016

Following a steep correction over the first six weeks of 2016 (which saw the S&P 500 decline 12% from its recent peak, hitting a fresh 52-week low), equity markets rebounded in late February and March, with domestic market indexes finishing the quarter up nearly from where they had started.  The sell-off in January was precipitated by plunging oil prices (which hit a 13-year low of $26 per barrel in February), as well as recurring fears of a slowdown in China (and potential ripple effects for the global economy).

Recently, oil prices and interest rates have been the biggest drivers of market sentiment.  Oil declined nearly 18% in Q4 of 2015, and heading into January that slide showed no signs of abating, with some analysts predicting prices as low as $15 per barrel.  Sustained prices at that level threaten the viability of a number of U.S. shale oil producers, whose production costs generally range between $30 and $60 per barrel.  Therefore, investors feared not just a wave of bankruptcies and defaults from energy producers, but also the follow-on impact to creditors, banks, and industrial equipment manufacturers.

Meanwhile, against a backdrop of muted global growth and increasingly aggressive monetary stimulus in Europe and Japan, the U.S. Federal Reserve’s stated intent to further raise interest rates (following a 0.25% increase in December) seemed oddly out-of-step.  Considering the U.S. economy’s meager wage growth and below-target inflation (thanks in part to low energy prices), many were skeptical of the need to raise rates.        Read the rest of this entry »


Q2 Review: The Merits of Benchmark Risk

July 27th, 2015

Broad equity indexes were essentially flat in the second quarter; the S&P 500 Index (large caps), the Russell 2000 Index (small caps), and the MSCI EAFE Index (international stocks) all advanced less than 1%.  Through the first half of the year, small cap and international equities were up modestly (5-6%), while the S&P 500 increased only 1.2% (including dividends).  Technology stocks fared somewhat better, with the Nasdaq Composite rising 2% in Q2 and 5.9% YTD.

A modest recovery in oil prices (which hit a 6-year low during the first quarter) helped the Bloomberg Commodity Index advance 4.7% during Q2.  However, this resurgence was short-lived, as crude prices surrendered most of these gains in the first weeks of July.  Despite a reduction in the number of active oil drilling rigs in the U.S., shale producers continue to improve the efficiency of existing wells, leading overall U.S. production to increase, even with prices down 50% from their peak.

Crude Oil vs. CHK

Of course, higher production only exacerbates the current supply/demand imbalance. Another longer term concern for oil traders is the recently-signed nuclear accord between the U.S. and Iran, which will lift restrictions on the sale of Iranian oil.  Once the second-largest producer in OPEC, Iran’s oil production has been cut in half following stiff international sanctions which reduced the country’s access to capital (and consequently, the productivity of its wells). Chinese demand (not just for oil, but other commodities as well) is another swing factor; that country’s slowing GDP growth rate is a headwind for prices of many commodities. Read the rest of this entry »

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