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Bristlecone Monthly News Digest

Greetings!


Where is the smart money?


If you ask ten different investors the question "Where is the best place to invest money now?" you are likely to come up with at least as many answers.  Gold bugs triumphantly point to a succession of recent high gold prices, along with record sovereign budget deficits which they assure us will imperil the existence of fiat currencies.  Bond bulls are equally convinced that slack consumer demand and persistent 10% unemployment create a deflationary threat which the Fed is likely to counter with aggressive "quantitative easing," further lowering interest rates and boosting bond prices.  Meanwhile, equity markets have staged a rally over the last two months, with the S&P 500 index rising nearly 13% since the end of August.  Finally, many agricultural commodities recently hit record highs as US Department of Agriculture estimates for 2010 crop yields came in lower than expected. 


Indeed, it is rare to see so many divergent asset classes (with often conflicting fundamental drivers) performing so well at the same time.  We expect this phenomenon to be short-lived, and the eventual de-coupling of asset class returns to once again highlight the value of a diversified portfolio blending securities with low (even negative) correlations.  With that in mind, this month we share a couple of articles highlighting the importance of asset correlations to portfolio construction, as well as an intriguing bullish argument for future stock returns from a well-respected mutual fund manager:


Why The Math Of Correlation Matters
October 4, 2010 - Wall Street Journal
This article offers a helpful introduction to the concept of correlation: what it means, how it is calculated, and how it can be used to optimize a portfolio's risk-adjusted performance.  >> Read the Article

Pension Funds Flee Stocks in Search of Less-Risky Bets
October 16, 2010 - Wall Street Journal

Like many individual investors, corporate pension plan sponsors are belatedly realizing the importance of risk management.  Five years ago, the average corporate pension plan had nearly 70% allocated to equities; today that figure is closer to 45%.  To the extent that this difference is re-allocated to asset classes with high expected returns and low correlations with equities, this may be a prudent shift.  Unfortunately, it seems more likely that most of this money has gone into bonds, the yields on which are hovering at multi-generational lows.  >> Read the Article


Oakmark Funds Q3 Commentary
September 30, 2010 - Oakmark Funds

Bill Nygren, portfolio manager for the Oakmark and Oakmark Select Funds, explains why record high levels of earnings retention among S&P 500 companies bodes well for future equity returns.  Many of the largest S&P 500 companies are trading at modest multiples of earnings while earning double-digits returns on shareholder's equity.  Ultra-low interest rates offer these companies the opportunity to issue cheap long-term debt (around 3% in several recent examples), the proceeds from which can be used to repurchase stock, providing an immediate boost to Earnings Per Share (EPS). >> Read the Article


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 October 2010
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Copyright � 2004-2010: Bristlecone Value Partners, LLC.; All rights reserved. This email is provided for general purposes only and is not intended to provide specific financial, accounting, or legal advice. Any mention of third party firms  or individuals is not, and should not be construed, as a recommendation, endorsement or sponsorship by Bristlecone Value Partners. Experiences expressed are not a guarantee of future performance or success and may not be representative of your experience. All investments are subject to risk. To safeguard your privacy, do not include account numbers, social security and tax ID numbers, passwords or other non-public information when replying to this email. Read more about Bristlecone's Privacy Policy.  All email sent to or from Bristlecone Value Partners corporate email system may be retained, monitored and/or reviewed by someone other than the recipient.