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


“A Slow Speed Train Wreck”

September 21st, 2016

The Los Angeles Times published an excellent long form series last week on the root causes of California’s burgeoning public pension funding gap.  It is an interesting backstory characterized by financial myopia, cognitive bias, and endemic conflicts of interest.

The LAT traces much of the problem to SB 400, a law passed in 1999 which significantly expanded pension benefits for more than 200,000 state workers, while also reducing the minimum age for full retirement benefits to 55 (50 for CA Highway Patrol officers).  At the time, the California Public Employee Pension Fund (CalPERS) was operating at a surplus thanks to a decade-long bull market which had more than tripled the fund’s assets between 1990 and 1999 (making it the largest pension fund in the country).  Proponents of the legislation extrapolated the fund’s recent returns into the future, and reasoned that benefits could be safely expanded without raising taxes. Read the rest of this entry »

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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 »

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Productivity and Prosperity

March 17th, 2016

Amidst the backdrop of extreme partisanship in this year’s presidential primary–and prevailing negative talking points on the state of the union–Berkshire Hathaway’s 2015 letter to shareholders offered a more optimistic take on America’s future.  Berkshire’s 85 year old CEO, Warren Buffett, reflected on the growth in living standards during his lifetime:

“American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. . . All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services.” Read the rest of this entry »

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2015 in Review: “Oil, Commodities & Currencies… Oh My!” The Sequel

January 30th, 2016

During the fourth quarter, global equity markets recovered from a sell-off in Q3, though the impact was modest (and from today’s vantage point, short-lived). The S&P 500 index rebounded 7% during Q4, yet barely eked out a positive return for the full year (+1.4% including dividends, the index’s worst performance since 2008). In fact, the only domestic equity category to generate meaningfully positive returns last year was Large Cap Growth, which was up in the mid-single digits. Moreover, leadership within that category was heavily concentrated in a handful of large technology companies known as the FANGs. Stripping out the performance contributions of Facebook (+36%), Amazon (+122%), Netflix (at +131% the top performing U.S. large company stock last year) and Google’s parent company, Alphabet (+49%) would have resulted in a negative return for the rest of the S&P 500. The FANGs’ average price-to-earnings ratio soared from 49 to 120 times, according to Bloomberg. Read the rest of this entry »

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2014 in Review: Oil, Commodities & Currencies… Oh My!

January 29th, 2015

As the current bull market (est. March 2009) nears the end of its 6th year, the breadth of equity outperformance has declined and pockets of value are harder to find.  While the U.S. stock market ended 2014 near all-time highs, leadership is increasingly concentrated among the largest companies, which drive performance of market-capitalization weighted indexes such as the S&P 500 (+4.9% in Q4, +13.7% in 2014).  Despite a strong 4th quarter, small cap stocks lagged in 2014.  The Russell 2000 Index rallied 9.7% in Q4, yet finished the year up only 4.9% (including dividends).  International stocks (both developed and emerging markets) delivered mostly positive returns in local currency terms, but modestly negative returns for U.S.-based investors, as the dollar appreciated approximately 13% against a basket of major foreign currencies in 2014.

This relatively pronounced currency movement is attributable to both strength in the U.S., and weakness abroad.  Based on common macroeconomic indicators (GDP growth, unemployment, etc.), the U.S. is further along in its recovery from the Great Recession than the Euro Zone or Japan, and that reality is reflected in monetary policy.  The U.S. Federal Reserve ceased its “quantitative easing” program in late 2014 and guided toward a likely increase in short-term rates sometime in 2015, assuming the economy continues to expand.  Meanwhile, both Europe and Japan continue to maintain a very accommodative (low interest rate) monetary policy, as these countries face a greater threat of deflation.  Anticipating higher interest rates in the U.S., many investors have begun re-allocating towards dollar-denominated assets, causing the dollar to rise and foreign currencies to weaken.  In our view, currency movements of last year’s magnitude are relatively infrequent in developed markets, and tend to be self-correcting once the pendulum swings too far in either direction.   As an aside, those interested in learning more about the pros and cons of a strong dollar might enjoy this recent NYT article on the subject. Read the rest of this entry »

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