Click here for a printer-friendly PDF of the Memorandum.

Refer to the SMA All-Cap Value Fact Sheet for the Top 20 Holdings and performance data as of the most recent quarter-end.

In this Muhlenkamp Memorandum:
Quarterly Letter
As June comes to a close, we find that most of the things we talked about in March haven’t changed much. Starting at the international level, both the European and Japanese Central banks continue to buy bonds (Japan also buys equities) in order to manage interest rates and support their economies. The European Central Bank hinted during a speech in late June that it may be appropriate to think about ending their program, but the Bank of Japan isn’t even discussing ending theirs. We’ll have to see how things develop…

Muhlenkamp & Company’s 40th Anniversary
This year marks the 40th anniversary of the founding of Muhlenkamp and Company, Inc. We are pleased, proud, and grateful that we have been able to serve our clients and the community for the last forty years…

Creating a Budget
A budget is a written plan of how you will spend your money for a specified time period (usually monthly). Typically in the form of a spreadsheet, this tool can help you manage your future spending in an attempt to keep your expenses aligned with your income and your financial goals. Budgeting is planning and looking forward, not backward…

Register for our Upcoming Webcast
On Tuesday, August 22, 2017 from 4:00 p.m. – 5:00 p.m. ET, join Tony Muhlenkamp as he hosts a chat with Portfolio Managers Ron and Jeff Muhlenkamp. You will have the opportunity to submit questions during the second half of our webcast.

Archive Available – May 11, 2017 Webcast
When it comes to building our portfolios, we say we build them from the bottom up and then we edit them from the top down. During our webcast Portfolio Manager Jeff Muhlenkamp along with President Tony Muhlenkamp shared our process. Jeff also talked about some of the key indicators that we are following to give investors an insight into what we are doing and why.

Don’t Be Left Out On Important Notices and Invitations
Muhlenkamp & Company regularly publishes information that gets distributed by email only. If you don’t want to be left out, join our email list by clicking HERE or call us at (877) 935-5520 extension 4. Your contact information will not be released to any third party.

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By Ron Muhlenkamp and Jeff Muhlenkamp, Portfolio Managers

As June comes to a close, we find that most of the things we talked about in March haven’t changed much. Starting at the international level, both the European and Japanese Central banks continue to buy bonds (Japan also buys equities) in order to manage interest rates and support their economies. The European Central Bank hinted during a speech in late June that it may be appropriate to think about ending their program, but the Bank of Japan isn’t even discussing ending theirs. We’ll have to see how things develop. French elections, which had the potential to be disruptive, turned out to be a non-event. We’ll see what Macron does now that he’s in power. He may manage to make some changes that will free up the French economy and get it moving again.

International trade has not been disrupted by a U.S./China trade war which some feared based on statements made by President Trump. Chinese economic growth continues to meet their government-set goals of about 6.5% and the renminbi has been fairly stable against the dollar. Interestingly, the organization that governs what countries are included in global stock indices decided in mid-June to start including Chinese shares in the global index (MSCI EAFE Index*) for the first time. Lastly, the war in Syria hasn’t created any economic problems either.

Domestically, the economy continues to grow at about 2% when adjusted for inflation. Inflation remains below 2%, aided by declining oil prices which have dropped from about $50 per barrel at the start of the year to close to $40 per barrel currently. Unemployment remains low but wages haven’t grown much. The Federal Reserve raised the Federal Funds rate (short-term interest rate they charge banks that sets short-term rates in the U.S.) by another .25% to 1.25% as expected and they detailed how they intend to reduce the size of their balance sheet in the near future, but not when they would start. While short-term interest rates have risen, long term-interest rates have not.

In the March newsletter and again during our May webcast (both of which can be located on our website www.muhlenkamp.com) we told you that small business optimism had improved immensely postelection—it remains at high levels even though neither the promised health care revamp nor tax cuts have yet come out of Washington. First quarter earnings in the aggregate were good, with both revenues and earnings coming in higher than the prior quarter. On the negative side, we are seeing enormous disruption in the retail sector as consumers change how they shop, creating a few big winners and many big losers. A year ago we saw increased bankruptcies in energy companies, now it’s happening to retailers. We are also seeing an increase in credit defaults by consumers—mostly with auto loans but a little bit with credit cards too.

The U.S. stock market, in aggregate, is expensive relative to its own history and margin debt (money borrowed from brokers to buy stocks, using the stocks themselves as collateral) is once again setting new highs.

That’s what we are seeing. Here’s what we think:
• We expect slow economic growth in the U.S. to continue in the short term while recognizing we can’t see very far down the road. The signs we are seeing in the credit markets are not immediately disconcerting, but will become a concern if they get worse. Increased business optimism hasn’t resulted in increased capital investment by companies—we’re watching for signs of that too.
• We think assets in general (bonds and stocks) have been supported in part by central bank asset purchases. That era may be coming to an end as the Federal Reserve begins to shrink its balance sheet. This makes us cautious and we’ll be paying close attention to the plans of the foreign central banks we’ve talked about as well as the implementation of the Fed’s plans.

Here’s what we are doing:
• We continue to sell assets that have done well for us and reached what we consider full value and invest in undervalued companies when we find them. We are comfortable holding cash when we can’t immediately find undervalued companies.
• We don’t own any bonds as they remain overpriced relative to inflation.
• We are slowly reducing our holdings of companies that are most exposed to the cyclical aspects of the domestic economy.

Until next quarter…

The comments made in this commentary are opinions and are not intended to be investment advice or a forecast of future events.

Refer to the SMA All-Cap Value Fact Sheet for the Top 20 Holdings and performance data as of the most recent quarter-end.

*MSCI EAFE Index is a stock market index that represents the equity market performance of large and mid-cap securities outside the U.S. and Canada. The EAFE acronym indicates that the location of the 21 developed markets are within Europe, Australasia, and the Far East.

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Don’t miss our next webcast!

Date: Tuesday, August 22, 2017

Time: 4:00 p.m. – 5:00 p.m. ET

Join Tony Muhlenkamp as he hosts a chat with portfolio managers Ron and Jeff Muhlenkamp. Along with our general economic and market observations, Ron will reflect on the first 40 years of Muhlenkamp & Company.

Ron will speak about:

• Lessons learned.

• Changes over the years.

• M&C going forward.

Registration is required, so CLICK HERE TO REGISTER.

After registering, you will receive a confirmation email containing information about joining the webcast. In addition to listening to the discussion, you will have the opportunity to ask questions.

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When it comes to building our portfolios, we say we build them from the bottom up and then we edit them from the top down. During the Muhlenkamp & Company webcast on Thursday, May 11, 2017, Portfolio Manager Jeff Muhlenkamp along with President Tony Muhlenkamp shared our process. Jeff also talked about some of the key indicators that we are following to give investors an insight into what we are doing and why.

Watch the video archive or read the amended transcription (including slides). The question and answer session is included.


Click here for the amended transcription (including slides).

Click here for slides only (no audio or transcription).

If you have questions or comments about the content of the webcast, don’t hesitate to send us a message or call us at (877)935-5520 extension 4.

For the Top 20 Holdings and performance data as of the most recent quarter-end, refer to the SMA All-Cap Value Fact Sheet.

The opinions expressed are those of Muhlenkamp and Company and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

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By Ron Muhlenkamp and Jeff Muhlenkamp, Portfolio Managers

Below is the single most interesting chart we’ve seen in the last quarter.

It is a plot of the National Federation of Independent Business (NFIB) Small Business Optimism Index since March 2000. The NFIB conducts monthly surveys of its members in order to better understand the environment in which small businesses are operating. The way we interpret the chart is that small businesses are MUCH more optimistic about their future post-election than they were pre-election (the arrow is there to highlight that move for you). If that increased optimism results in greater hiring and spending on capital goods, we believe the economy can grow significantly faster than it has managed to do the last few years. In part we think the chart validates our assertion that increased regulations and costs have been limiting business growth—and the promise to reduce them has small businesses more optimistic than they’ve been in years. The questions now are “Will our politicians deliver on their promises?” and “Which companies will benefit and which will be hurt by the changes?” That’s what we are paying a lot of attention to right now.

While potential U.S. policy changes are the most important things going on, they aren’t the only things to keep an eye on. A quick update on some pertinent developments: the U.S. Federal Reserve raised the Federal Funds Rate by .25% in March. This is the third rate hike by the Fed since the ’09 recession and was largely expected. The Fed has stated that they may continue to raise short-term rates this year as the country is near their employment and inflation goals. At this point we don’t expect a rapid run up in inflation nor do we see rising interest rates triggering a recession. Either or both of those things may happen in the future, but we don’t see signs that they are imminent.

U.S. companies in the aggregate in the 4th quarter of 2016 reported an increase in both earnings and revenues—the first time we’ve seen that in five quarters, led by improvements in the energy sector where higher crude oil prices (now in the vicinity of $50 per barrel) have led to increased drilling activity. The strong dollar we saw late last year has weakened a little, easing pressure on the earnings of our exporters. Long-term interest rates have also declined a bit since last year, keeping the cost of rolling over debt low for those companies that need to do so. From a consumer perspective, rising short-term rates will provide savers a marginally better return on savings accounts, money markets, and short-term certificates of deposit but inflation adjusted returns on fixed income products are still pretty poor, as we’ve been pointing out for a long time now. On the consumer borrowing side, rates are pretty cheap with 30 year mortgage rates at about 4% — they’ve been as high as 4.2% and as low as 3.8% over the last year.

Outside of the U.S., elections in France and Germany later this year have the potential to disrupt the Eurozone. Belgian elections in March resulted in a re-election of the status quo, we’ll have to see what develops in France and Germany. The European Central Bank (ECB) continues to buy bonds, keeping interest rates low in Europe and, we believe, helping to keep interest rates low in the U.S. That program is scheduled to end in December, it isn’t clear if the ECB will let it expire or extend it once again. On a positive note, real Gross Domestic Product (GDP) growth in Europe the last quarter was 1.9%, much improved over a year ago and on par with U.S. GDP growth.

The U.S. stock markets remain on the expensive side, as they’ve been for some time now. In the absence of signs of an approaching recession or financial crisis we have stuck to our knitting, selling holdings that have reached full value and reinvesting the proceeds in companies we believe are selling for less than we think they are worth—though good companies selling cheaply are few and far between these days.

Until next quarter…

The comments made in this commentary are opinions and are not intended to be investment advice or a forecast of future events.

Refer to the SMA All-Cap Value Fact Sheet for the Top 20 Holdings and performance data as of the most recent quarter-end.

Glossary
Federal Funds Rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. It is the interest rate banks charge each other for loans.

Federal Reserve Board (informally referred to as “the Fed”), is the central banking system of the United States, created in 1913 by the Federal Reserve Act. The main tasks of the Fed are to supervise and regulate banks, implement monetary policy by buying and selling U.S. Treasury bonds, and steer interest rates.

Gross Domestic Product (GDP) is the total market value of all goods and services produced within a country in a given period of time (usually a calendar year).

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Click here for a printer-friendly PDF of the Memorandum.

Refer to the SMA All-Cap Value Fact Sheet for the Top 20 Holdings and performance data as of the most recent quarter-end.

In this Muhlenkamp Memorandum:
Quarterly Letter
The plot of the National Federation of Independent Business (NFIB) Small Business Optimism Index since 2000 is one of the most interesting charts that we’ve seen in the last quarter. The NFIB conducts monthly surveys of its members in order to better understand the environment in which small businesses are operating. The way we interpret the chart is that small businesses are MUCH more optimistic about their future post-election than they were pre-election…

Facing the Facts about Your Financial Life
As an amended excerpt from the Muhlenkamp Marathon Financial Training Workbook, this article places you at the “starting line” of your financial marathon, asking you to periodically look at and assess your current financial situation…

Register for our May 11, 2017 Webcast
On Thursday, May 11, 2017 from 4:00 p.m. – 5:00 p.m. ET, join Tony Muhlenkamp as he hosts a chat with Portfolio Managers Ron and Jeff Muhlenkamp. You will have the opportunity to submit questions during the second half of our webcast.

Archive Available – February 16, 2017 Webcast
Visit the archive of our February 16, 2017 webcast. Ron’s maxim, “When you change the rules a little, you change the game a lot,” applies to many things in life. During our webcast, Jeff and Ron looked at the potential impact and the second- and third-order effects that changing policies and regulations by President Trump and his new administration could have on the economy.

Don’t Be Left Out On Important Notices and Invitations
Muhlenkamp & Company regularly publishes information that gets distributed by email only. If you don’t want to be left out, join our email list by clicking HERE or call us at (877) 935-5520 extension 4. Your contact information will not be released to any third party.

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Ron’s maxim, “When you change the rules a little, you change the game a lot,” applies to many things in life. During our webcast, Jeff and Ron looked at the potential impact and the second- and third-order effects that changing policies and regulations by President Trump and his new administration could have on the economy.

Since the last recession, some small businesses have been reluctant to expand because they were unsure of the rules: the possibility of increased taxes, expanding healthcare costs, and more regulations. After the 2016 election, small business confidence spiked. Jeff and Ron debated what may have boosted optimism. They also talked about current interest rates, bond rates, the dollar, and ongoing concerns in Europe.

Watch the video archive or read the amended transcription (including slides). The question and answer session is included.


Click here for the amended transcription (including slides).

Click here for slides only (no audio or transcription).

If you have questions or comments about the content of the webcast, don’t hesitate to send us a message or call us at (877)935-5520 extension 4.

For the Top 20 Holdings and performance data as of the most recent quarter-end, refer to the SMA All-Cap Value Fact Sheet.

The opinions expressed are those of Muhlenkamp and Company and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

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Click here for a printer-friendly PDF of the Memorandum.

Refer to the SMA All-Cap Value Fact Sheet for the Top 20 Holdings and performance data as of the most recent quarter-end.

In this Muhlenkamp Memorandum:
Quarterly Letter
2016 was a disappointing year for us as our accounts, on average, lost about 3.56% of their value over the course of the year (individual performance varies by account), while the S&P 500 gained 11.96%—both figures include reinvestment of income. The obvious question is “Why the underperformance relative to your benchmark?”…

Letter from the President
As Ron and Jeff pointed out in their discussion of performance, 2016 was disappointing. So our clients and shareholders have rightfully been asking what we are going to do differently to improve performance…

Register for our Upcoming Webcast
On Thursday, February 16, 2017 from 4:00 p.m. – 5:00 p.m. ET, join Tony Muhlenkamp as he hosts a chat with Portfolio Managers Ron and Jeff Muhlenkamp. You will have the opportunity to submit questions during the second half of our webcast.

Make a Financial New Year’s Resolution
The beginning of a new year is a great time to get on the right course. We created our Muhlenkamp Marathon Financial Training Workbook (with some running tips, too) to provide 26.2 miles of financial guidance…

Archive Available – December 1, 2016 Webcast
Is the economy back to pre-recessionary levels? Your answer may depend on what data you use and how you define your terms. Jeff and Ron Muhlenkamp walk through over 20 economic charts from foreign currencies vs. the dollar, to their 10-point checklist they use as a guide.

Don’t Be Left Out On Important Notices and Invitations
Muhlenkamp & Company regularly publishes information that gets distributed by email only. If you don’t want to be left out, join our email list by clicking HERE or call us at (877) 935-5520 extension 4. Your contact information will not be released to any third party.

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By Ron Muhlenkamp and Jeff Muhlenkamp, Portfolio Managers

2016 was a disappointing year for us as our accounts, on average, lost about 3.56% of their value over the course of the year (individual performance varies by account), while the S&P 500* gained 11.96%—both figures include reinvestment of income. The obvious question is “Why the underperformance relative to your benchmark?” The short answer is that we didn’t own enough of the best performing sectors in the market: energy, financials, and industrials and we owned too much of the worst performing sector in the market: health care.

Low crude oil prices in January and February gave us an opportunity to buy energy companies cheap, and we did. In retrospect we should’ve bought more as crude oil prices have nearly doubled off of the bottom and energy stocks have been the market’s best performers this year. In a similar manner our energy holdings have been our best performers this year.

Last year and early this year, we deliberately reduced our positions in companies that are sensitive to the business cycle which includes industrial and financial companies as prices fully reflected the value we saw in those companies and our expectations for business performance during the current economic expansion. The market turned a cold shoulder to those companies through March, but warmed up to them in the spring and summer and fully embraced them postelection. Industrials and Financials have been the best performing stocks in the last two months. They didn’t get cheap enough for us to buy into them earlier in the year and so we didn’t participate in their outperformance late in the year.

Health care stocks have been declining for over a year and we found some great companies at low prices throughout the year. Unfortunately, the market has yet to agree with us on our assessment of these companies and their stock prices have continued to lag the market. We don’t expect that to last forever and believe we are best served by waiting for the market to come around to our point of view. This year, however, that attitude has not been profitable.

Throughout the year our technology companies have done quite well both in terms of company performance and stock price appreciation.

So in summary, this year we zigged and the market zagged—as a result we look pretty dumb. That doesn’t mean we’ve changed our approach to investing: we haven’t. We continue to invest in companies that are selling for less than we think they are worth, and sell them when the market price fully reflects that value. We continue to believe that, on average, doing so will produce satisfactory investing results. This year it did not.

Continuing to look in the rear view mirror, we saw ongoing slow economic growth both in the U.S. and internationally and a continuation of unprecedented central bank** intervention in both the European Union and Japan. U.S. companies, in aggregate, reported declining revenues and earnings during the first two quarters of the year with growth in both measures returning in the third quarter. They haven’t reported the fourth quarter yet. Interest rates declined from January through July, with the benchmark 10-Year U.S. Treasury yield going from 2.2% in Jan to 1.4% in early July then rising to 2.6% or so by year end. As a reminder, bond prices move inversely to yields, so bonds had a good first half of the year and a poor second half. Politics were also responsible for some big market moves with the Brexit referendum in the United Kingdom driving the pound sterling to record lows and the election in the United States spurring an impressive rally in the U.S. equity markets.

Looking forward, we see no reason to expect a near-term resolution to many of the global risks we’ve been watching: European banking problems and existential threats to the European Union; massive debt and economic stagnation in Japan; and massive debt and slowing growth in China. Each of those regions could spark a global financial crisis of some sort and we’ll continue to keep an eye on them.

The U.S., however, has changed a little bit—you may have noticed. The U.S. voter opted for change and installed a Republican majority in the Senate and a fairly unique Republican in the White House. We think many (but not all) of the changes suggested by the newly elected politicians should result in stronger economic growth in the long run but implementation will matter and it will take some time to put the new rules, once they’re actually written, in place. So we are much more optimistic about the long-term direction of the economy than we were a few months ago, but we don’t expect an immediate impact to the economy from changing policies, regulations, and laws—there will be a lag. The market, however, shifted in less than thirty days from anticipating a Democratic agenda to anticipating a Republican agenda. In the process it may have gotten a little bit ahead of itself. As noted above, interest rates have been on the rise since July with the election in November and the Federal Reserve rate hike in December adding to the ongoing move. Historically, long-term interest rates have been about 3% above inflation, so we view a further movement higher in rates as simply a return to “normal” conditions. A return to normal will not necessarily be painless, however, and we’ll keep a close eye on default rates and credit spreads*** if rates continue to rise. Rising interest rates in the U.S. while the rest of the world keeps their interest rates abnormally low also creates the conditions conducive to a strong dollar, which we have been observing the last few months already. A strong dollar of course is beneficial for the U.S. consumer buying imported goods and a headwind to the U.S. producers selling overseas or owning overseas assets. It also encourages overseas investors to buy investable assets in the U.S. for as long as it continues since they’ll get the asset return plus a positive currency return. Full employment and rebounding commodity prices put inflation risks back on the table, so we’re keeping an eye out for higher inflation as well.

We believe the stock market in general is fairly priced and good companies at cheap prices are few and far between. When we find them, we’ll invest appropriately. Until we find them, we’ll continue to be patient with our cash. We remain uninterested in bonds as they are still priced above what we view as “fair” relative to current inflation and will decline even more if inflation picks up. Conversely they will likely do well if a financial crisis brews up and investors rotate from stocks to Treasury bonds in search of safety. We believe the long-term decline in interest rates has pretty well come to an end which implies the long running bond bull market has also ended. Few bond investors can remember a time when interest rates weren’t generally falling and they are susceptible to thinking bonds are “safe” when we would argue that is no longer true.

With our best wishes for the New Year,

The comments made in this commentary are opinions and are not intended to be investment advice or a forecast of future events.

Refer to the SMA All-Cap Value Fact Sheet for the Top 20 Holdings and performance data as of the most recent quarter-end.

Earnings growth is not representative of an investment’s future performance.

*S&P 500 Index is a widely recognized, unmanaged index of common stock prices The S&P 500 Index is weighted by market
value and its performance is thought to be representative of the stock market as a whole. One cannot invest directly in an index.

**Central Bank is the entity responsible for overseeing the monetary system for a nation (or group of nations). The central banking system in the U.S. is known as the Federal Reserve (commonly referred to “the Fed”), composed of twelve regional Federal Reserve Banks located in major cities throughout the country. The main tasks of the Fed are to supervise and regulate banks, implement monetary policy by buying and selling U.S. Treasury bonds, and steer interest rates.

***Credit spreads refer to the difference in the number of percentage points or basis points in yield. The level of risk correlates with the
potential for returns.

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Is the economy back to pre-recessionary levels? Your answer may depend on what data you use and how you define your terms. Jeff and Ron Muhlenkamp walk through over 20 economic charts from foreign currencies vs. the dollar, to their 10-point checklist they use as a guide.

Watch the video archive or read the amended transcription (including slides). We think you will find it informative.


Click here for the amended transcription (including slides).

Click here for slides only (no audio or transcription).

If you have questions or comments about the content of the webcast, don’t hesitate to send us a message or call us at (877)935-5520 extension 4.

For the Top 20 Holdings and performance data as of the most recent quarter-end, refer to the SMA All-Cap Value Fact Sheet.

The opinions expressed are those of Muhlenkamp and Company and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

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Ron appeared on CNBC February 2, 2017

Ron Muhlenkamp made a guest appearance on CNBC’s ‘Closing Bell’ on February 2, 2017. He appears in the segment titled...
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Ron appeared on CNBC January 12, 2017

Ron Muhlenkamp made a guest appearance on CNBC’s ‘Closing Bell’ on January 12, 2017. He appears in the segment titled...
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