Don’t miss our next webcast:

Join Tony Muhlenkamp as he hosts a chat with portfolio managers Ron and Jeff Muhlenkamp. They will discuss the current market conditions and the state of the economy. In addition to listening to the discussion, you will have the opportunity to ask questions.

Date: Thursday, August 30, 2018

Time: 4:00 p.m. – 5:00 p.m. ET

Registration is required, so CLICK HERE TO REGISTER

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No File Found

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
Allow us to summarize what we’re seeing so far this year. The U.S. economy is doing well, with 1st quarter Gross Domestic Product (GDP) growth coming in at 2%, unemployment in May was a low 3.8%, and inflation was 2.8%…

Relevant Elements for Investment Strategy
I’ve had conversations with clients that have touched on themes and topics that I think are worth sharing. Some of the topics are long term and strategic, others are more tactical, and the challenge is to weave them into something that is useful and intelligible…

Register for our Upcoming Webcast
Join Tony Muhlenkamp as he hosts a chat with portfolio managers Ron and Jeff Muhlenkamp. Hear about current market activity and the state of the economy. In addition to listening to the discussion, you will have the opportunity to ask questions.

Archive Available – May 24, 2018 Webcast
During our webcast, Ron and Jeff walked us through a number of economic and financial indicators to better understand the U.S. economy and asset markets. They concluded that the economy will likely continue to grow at 2% or a little better, but that rising interest rates and other actions of the Federal Reserve increase the likelihood of problems with businesses or countries that need low interest rates to survive. They believe the markets will remain volatile as investors grapple with these two diametrically opposed pressures.

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By Ron Muhlenkamp and Jeff Muhlenkamp, Portfolio Managers

Allow us to summarize what we’re seeing so far this year. The U.S. economy is doing well, with 1st quarter Gross Domestic Product (GDP) growth coming in at 2%, unemployment in May was a low 3.8%, and inflation was 2.8%. The interest rate on 2-year U.S. Treasury notes at the end of June was roughly 2.5%, 10-year U.S. Treasury notes yield almost 2.9%, and the average 30-year fixed mortgage rate in the county is 4.4%. As of June 30, 2018 the S&P 500 Total Return Index is up 2.65% since the beginning of the year. The Federal Reserve continues to raise short-term interest rates and continues to reduce their balance sheet as they said they would. Internationally, the dollar is up about 5% against a basket of foreign currencies year to date. The stock markets of a number of emerging markets have sold off with Turkey down 32%, Brazil down 20%, and China down 20% as examples. The European Central Bank (ECB) continues to pursue their policy of negative interest rates and asset purchases, though they have reduced the amount of assets they purchase each month and have reiterated their intention to end the program by the end of 2018. The Bank of Japan (BOJ) continues to pursue its policy of low interest rates and asset purchases as well. Italy has elected a populist government which raises the prospect of policy conflict with the rest of the European Union and disagreements over immigration are threatening the German coalition government led by Angela Merkel.

What do we make of all this?

First, we still don’t like bonds with a duration of longer than three to four years as they are mispriced relative to inflation (historically the 10-year treasury yield would be roughly 3% above inflation, which would make a 5.5% – 6% yield “normal” with today’s inflation). Second, while it is appropriate and necessary (necessary because abnormally low interest rates are killing savers, pensions chief among them) for the Fed to raise interest rates and try to get them back to something approaching the historical norm, we foresee two challenges: the easy money policies of Europe and Japan are keeping our long-term interest rates low, hindering our efforts; and a decade of cheap money has gotten baked into a lot of business plans. Higher cost money will be a problem and no one (neither the Fed nor us) can know exactly what interest rate will start to cause serious problems. So while the Fed intends to return rates to normal without disrupting either the markets or the economy, they may be unable to pull off such a feat.

Third, higher inflation would put the Fed on the horns of a dilemma: should they stick with the slow pace of rate increases and risk still higher inflation and all the problems that would bring or should they raise rates faster and risk slowing the economy in a bid to keep inflation at a reasonable level? Market participants are alert to this dilemma and paying very close attention to inflation data.

Fourth, the tax law changes passed at the end of 2017 plus regulatory changes are having a beneficial effect on the economy. The economic indicators we monitor all look pretty good with few signs of trouble to be seen. Corporate earnings were strong in the first quarter with sales growth of 8% and earnings growth of 22%.

Fifth, Europe and emerging markets are the most likely sources of external economic shocks. Europe because of the political turmoil, emerging markets because many of them borrowed heavily in dollars when dollars were cheap and will find it difficult to repay the loans now that dollars are more expensive.

We’ve been saying all year that we expected economic growth and earnings to increase but that higher interest rates should cause price-to-earnings ratios (P/E) to decline. Both of those things are happening, roughly offsetting each other so far resulting in only modest changes to stock prices and a small decline in bond prices. 

That’s what we see at a high level. Economically things are pretty good but there are a number of things that could upset the economy or the markets and we’re keeping an eye out for them. We continue to spend most of our time looking for investment opportunities and managing our current investments. We are comfortable carrying a bit of cash given the tug of war between the economic strength and monetary tightening but we are equally comfortable putting money to work when we find what we believe is an attractive investment.

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.

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).

Price-to-Earnings Ratio (P/E) is the current price of a stock divided by the (trailing) 12 months earnings per share.

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. You cannot invest directly in an index.

No File Found

During our webcast, Ron and Jeff walk through a number of economic and financial indicators to better understand the U.S. economy and asset markets. They conclude that the economy will likely continue to grow at 2% or a little better, but that rising interest rates and other actions of the Federal Reserve increase the likelihood of problems with businesses or countries that need low interest rates to survive. They believe the markets will remain volatile as investors grapple with these two diametrically opposed pressures.

Watch the video archive or read the amended transcription (including slides).


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.

No File Found

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 first quarter of 2018 was marked by a sharp market correction and the unraveling of some very popular investment themes. The correction kicked off in February when wage data triggered inflation fears which caused bond yields to jump up and equity prices to drop…

Volatility and the VIX Collapse
At a high level, interest in measures of the change in stock prices really began with the development of Modern Portfolio Theory (MPT) in 1952 by Harry Markowitz…

Register for our Upcoming Webcast
Join Tony Muhlenkamp as he hosts a chat with portfolio managers Ron and Jeff Muhlenkamp. They share their views of the recent market swings and their concern of investors’ margin debt. They will discuss their political and economic observations and what they feel is important to monitor.

Archive Available – February 22, 2018 Webcast
Ron and Jeff Muhlenkamp explained that recent tax cuts and deregulation should help keep the economy moving. Asset markets, on the other hand, could be affected by monetary tightening as the Federal Reserve and other central banks reduce or reverse their easy money policies. Tightening of the money supply could cause bond yields to increase and some market disruptions.

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By Ron Muhlenkamp and Jeff Muhlenkamp, Portfolio Managers

The first quarter of 2018 was marked by a sharp market correction and the unraveling of some very popular investment themes. The correction kicked off in February when wage data triggered inflation fears which caused bond yields to jump up (bond prices dropped) and equity prices to drop. The rapid drop in equity prices caused volatility to spike up, resulting in massive losses in several exchange traded notes that were short the VIX. [A brief aside is perhaps in order here: Volatility is a measure of how much market prices change on a day-today basis. Current Wall Street practice is to equate volatility with risk, which means there developed a need to measure volatility. The Chicago Board Options Exchange (CBOE) filled this need by creating the VIX index, which is their measure of expected overall market volatility based on options pricing information. Wall Street being Wall Street, they then developed ways to invest in volatility via exchange traded funds (ETFs), exchange traded notes (ETNs), futures, etc. To be “long volatility” is to profit if volatility increases—daily price swings become greater. To be “short volatility” is to profit if volatility declines—daily price swings become smaller.] Several of the affected exchange traded notes folded a week or two later. The unwinding of the short volatility trade just got the ball rolling. Allegations of misuse of data hit Facebook (FB) shortly thereafter, taking 20% out of the stock price over the course of two months, and the pain spread to other members of the FANGs (Facebook, Amazon, Netflix, and Google) which had been market leaders for over a year. President Trump’s tweets against Amazon (AMZN) hit that stock to the tune of 12%. An accident involving an Uber autonomous vehicle in Arizona that resulted in the death of a pedestrian hit NVIDIA (NVDA), Tesla (TSLA), and other companies that are involved in developing autonomous cars. The imposition of tariffs by the U.S. and retaliatory tariffs by China hit a broad swath of importers and exporters in the market.

Market corrections are a fact of life for the investor and, so far, this correction is pretty run of the mill at about a 9% drop from the late January peak. What makes it interesting, and what we were trying to point out in the opening paragraph, is that a number of very popular investments have all found their own reasons to unwind nearly simultaneously. When an investment becomes very popular and everybody is on the same side of the trade, it doesn’t take much to reverse the momentum. We think that’s what happened over the last month or two with these trades and we expect momentum to continue to come out of them. What we don’t know is the longer-term effect on the larger market. There is enough margin debt held by investors that forced selling could exacerbate the decline. We don’t think we’ve seen it yet, but the possibility remains.

We’ve spoken before about the difference between the game of the stock market and the business of investing. We consider betting on price changes of Bitcoin and whether volatility will increase or decrease to be stock market games—the item you are betting on has no value or economic meaning. Most companies produce real products and their stock prices reflect the value they add to their customers in the current investment climate. We consider these stocks as reflective of the business of investing. “FANG” type stocks are a mix. Though the companies and products are real, investing in these stocks at such high current valuations can take on the aspect of a game since their recent stock prices assume success into a far distant future, not based on their current earnings. We prefer the business of investing and generally try to avoid stock market games.

We continue to keep an eye on the economy and it continues to do well. Of all the indicators we watch, the only one that is concerning is the increase in auto loan delinquencies. It looks to us like the economy will continue to grow at around 2% [real GDP growth] for as far as the economic eye can see, but that’s only about 6-9 months into the future. During quarterly earnings conference calls, most companies spoke about the effects of the tax cuts passed by Congress in December. In many cases, management indicated they were passing some of the savings to their employees, using some of it to accelerate business investments and increase capital spending, and passing some along to shareholders as dividends or via stock repurchases. We have highlighted previously that low capital spending was unique to this expansion and a drag on economic growth. We’ll be watching closely to see if managements follow through on their spending plans and what effect it has on the economy. We continue to believe the tax cuts are a net positive for the economy.

The possibility of higher inflation remains a concern of ours and was clearly front of mind for investors in early February. The potential for higher inflation certainly exists, but that’s been true for ten years now, and neither we nor anyone else we’ve read has accurately predicted the low inflation and intermittent deflation we’ve actually gotten. Instead of guessing, we’ll let the facts inform us. Right now, we are seeing inflation on the order of one to two percent.

As advertised, the Federal Reserve has begun to very slowly reduce the financial assets it holds on its balance sheet. We discussed in our last newsletter that we thought this would put downward pressure on asset markets even as the tax cuts and resultant economic activity put upward pressure on the markets. What we’ve seen this quarter, as described in the first paragraph, is a number of areas that were perhaps a bit bubbly, start to deflate. Our expectation of the impact of the shrinking Fed balance sheet is beginning to be realized. What will be important now is whether the declines start to reinforce each other and create a larger, general decline, or not.

We’ve raised a bit of cash recently as several holdings became overly large and/or their price reflected what we believed was the value of the company. As always, we are looking for good companies to invest in and will do so when we find them.

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.

No File Found

Ron and Jeff Muhlenkamp explain that recent tax cuts and deregulation should help keep the economy moving. Asset markets, on the other hand, could be affected by monetary tightening as the Federal Reserve and other central banks reduce or reverse their easy money policies. Tightening of the money supply could cause bond yields to increase and some market disruptions.

Watch the video archive or read the amended transcription (including slides).


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

If you had told us a year ago that the market would rise 20% in 2017, we would have been skeptical. Yet, here we are at the end of the year and the S&P 500 Total Return Index was up 21.83% for 2017. The S&P 500 Index was up 19.42%. (The difference is the Total Return Index includes dividends.) Technology stocks led the charge; health care, consumer discretionary, and industrials also beat the average. Every other sector delivered below-average returns with energy and telecommunication services posting losses for the year. Our performance was quite close to the S&P 500 Index all year. (Please refer to the 12/31/2017 Fact Sheet for our final performance numbers.) Apple, Inc. (AAPL), ON Semiconductor Corporation (ON), and Universal Display Corp. (OLED) contributed the most to our performance this year, while Teva Pharmaceutical Industries (TEVA), Spirit Airlines (SAVE), and Allergan PLC (AGN) were the biggest drags.

Economically speaking, U.S. Gross Domestic Product (GDP) growth during the first three quarters (4th quarter data hasn’t come out yet) averaged a little over 2.1%, but 1st quarter was the low quarter, and 3rd quarter was the high quarter—so the trend was up (which has been the case since June 2016). Unemployment is generally low, inflation is low, and most of the economic metrics we keep an eye on are looking benign. If you want more detail on that, we’ll refer you to the webcast we did at the end of November.

At a high level, two “big things” are happening. First, the Trump administration and Congress are working to remove legal and regulatory impediments to economic growth. They are obviously not unified in this effort and the process has been, shall we say, contentious. Nonetheless anti-growth regulations have been rolled back to a degree and a new tax law was signed just before Christmas. We think this is the reason Small Business Confidence jumped post-election and remains at a very high level. We think the new tax law and the shift in the regulatory environment are generally positive developments. We think of it in these terms: when businesses are fleeing your borders, it is a HUGE sign that you are doing something wrong. When businesses hire armies of lawyers to avoid taxes instead of simply paying them, it’s a sign you are doing something wrong. It’s been happening in the U.S. for years now, as companies merge with foreign businesses to shift their headquarters to more welcoming tax and regulation locales or create complicated corporate structures and hold cash overseas to reduce taxes. Erecting barriers to exit was the knee-jerk reaction but it never works. Congress is taking action to address the root causes of businesses leaving the U.S. and we think what they’ve done will improve the situation. It’s also happening at the state level, just look at Illinois as businesses move to Indiana. Illinois hasn’t figured this out yet and continues to chase businesses away. Does anybody think Amazon is seriously considering putting its second headquarters in Chicago? We doubt it.

The second “big thing” is the movement of interest rates in the direction of what we think is “normal” and the reduction of assets held by the U.S. Federal Reserve. As you probably know, for two years the Federal Reserve has been gradually raising short-term rates. Allowing rates to rise to where they “should be” relative to inflation is a positive. If they raise rates more than that, it will become a negative. Additionally, this summer the Federal Reserve started executing a plan to gradually reduce the assets they hold on their balance sheet by not reinvesting all of the money they receive when bonds mature. Their plan is to initially reduce their assets by $10 billion per month ramping that up to $50 billion per month over time.

Simultaneously, the European Central Bank has announced a reduction in its bond purchase program beginning in January 2018. The Bank of Japan is the only major Central Bank that has not signaled a reduction in its “print and purchase” program. We believe that all the money printed during the last 8 years helped boost asset prices—stocks, bonds, houses. As central banks start slowly withdrawing some of that money, it may well have a reverse effect on asset prices. The Federal Reserve certainly intends to draw down their balance sheet slowly enough that markets don’t even notice, but they may not succeed in that. We laid this out in greater detail during our November webcast, take a look at that or give us a call if you want to have a fuller discussion of our thoughts on this.

As we look forward to 2018 then, we see two “big things” working in opposition to each other as far as the markets are concerned: prospects for improved economic growth is a plus, while a reversal (U.S) or reduction (Europe) of central bank support is a negative. Each of these forces may get traction at different times.

With that as a backdrop, we will continue to search for investment opportunities and put our money to work when we find them.

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.

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.

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.

No File Found

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
If you had told us a year ago that the market would rise 20% in 2017, we would have been skeptical. Yet, here we are at the end of the year and the S&P 500 Total Return Index was up 21.83% for 2017. The S&P 500 Index was up 19.42%…

Don’t Let the IRS Define Your Investing
The idea of “spend the income, don’t touch the principal.” It’s an investing mantra that has been passed down and has become the guiding principle for how to invest in retirement; invest for the maximum income; spend that income, and don’t touch the principal. I think this ignores the effects of inflation and taxes on your assets and it’s a trap that hinges on allowing the IRS to define the terms of investing…

Register for our Upcoming Webcast
On Thursday, February 22, 2018 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. What do the recent tax cuts mean to you and to businesses? How may the actions of central banks be influencing the markets? Ron and Jeff will discuss their thoughts on these matters as well as others that they continue to monitor.

Archive Available – November 30, 2017 Webcast
During the conversation, Ron and Jeff shared their review of 2017, a year with unusually low market volatility, record-high market levels, and expensive equity valuations. They provided charts and checklists to better explain consumer and business spending and optimism, inflation, investors’ margin accounts, and many other items they monitor to determine where the economy is at year end and what concerns them going into 2018.

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

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Tony Muhlenkamp hosted a chat with our portfolio managers Ron and Jeff Muhlenkamp. During the conversation, Ron and Jeff shared their review of 2017, a year with unusually low market volatility, record-high market levels, and expensive equity valuations. They provided charts and checklists to better explain consumer and business spending and optimism, inflation, investors’ margin accounts, and many other items they monitor to determine where the economy is at year end and what concerns them going into 2018. They also explained how actions of the Japanese and European central banks may be influencing the U.S. stock market.

Watch the video archive or read the amended transcription (including slides).


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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