Ron and Jeff Muhlenkamp update their views on the economy and the global investing environment. Negative developments include: slowing global economic growth and diminishing positive impacts from the 2017 tax law changes. Positive developments include: a fairly stable domestic economy and a shift in Federal Reserve attitudes and possibly actions. Give it a listen for more details.

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
When we began 2018, we thought the markets would be dominated by two important changes: the passage of the new tax law in the final days of 2017 and a decline in dollar liquidity as the Federal Reserve both raised short-term rates and reduced the size of its balance sheet

Letter to My Daughters: On Retirement
Girls, I hate to tell you this, but you should plan on saving more and working longer than your parents and grandparents…

Avoiding Escheatment
Escheatment is when forgotten, abandoned, or unclaimed property (including physical and financial assets) is turned over to the state of the owner’s last known residence if the company holding the property is unable to contact its rightful owner. Take steps to prevent escheatment of your accounts…

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 – November 15, 2018 Webcast
At our November webcast, Ron and Jeff Muhlenkamp examined the ripple effect and the unintended consequences of changes to interest rates, regulations, tariffs, and the money supply. An example being: In an effort to unwind its Quantitative Easing measures, the Federal Reserve is continuing to raise short-term interest rates and reduce its balance sheet. These higher interest rates have contributed to a slowdown in the housing market which could lead to a decline in home prices.

No File Found

By Ron Muhlenkamp and Jeff Muhlenkamp, Portfolio Managers

When we began 2018 we thought the markets would be dominated by two important changes: the passage of the new tax law in the final days of 2017 and a decline in dollar liquidity as the Federal Reserve both raised short-term rates and reduced the size of its balance sheet. We thought the first change would be good for the economy in both the short and long-term and the second change would be negative for most asset markets. We didn’t hazard a guess regarding when the negative influence would start to appear. As a result, we were comfortable holding some cash at the start of the year but also wanted to participate if the economy took off.

As the year unfolded we ended up selling into what was a rising market in the spring and summer—not because of the larger view, but because of changes to the fundamental outlook or the price action of the stocks we owned. We sold some companies because their business prospects changed and no longer met our expectations and sold others that had become fully valued or overvalued and lost their upward price momentum—our normal sell criteria. Since we were unable to find good companies at attractive prices we held onto the cash. As a result, we looked pretty dumb during the first half of the year with our return significantly underperforming a still rising S&P 500. When the S&P 500 began to decline in September and October we didn’t look (or feel) quite so dumb as our cash helped us to outperform on a relative basis late in the year. The outperformance late in the year was not enough to outweigh the underperformance earlier in the year, thus we underperformed for the year as a whole.

As we begin 2019 we are still in a slowly shrinking dollar liquidity environment: the Federal Reserve has indicated it will continue to shrink its balance sheet and consider additional short-term rate increases during the year. Additionally, the European Central Bank (ECB) ended its asset buying program in December 2018, so it is no longer pushing additional euros into global asset markets. Thus, support of asset prices by central banks continues to gradually shift into reverse. This year we cannot identify any big positive change(s) for the U.S. economy like last year’s tax bill. In fact, in October we saw a decline in U.S. housing activity as high new home prices and higher mortgage rates reduced new home sales. We expect the slowdown in housing to continue in 2019 and consider it an incremental negative as we look at the U.S. economy. Additionally, we don’t see a big positive for any other economy around the globe. We are seeing slowing economic growth in Europe, Japan, and China as well. In sum we are seeing slowing economies and shrinking liquidity —a poor environment for good returns on assets.

Our outlook on inflation has shifted a little bit recently. Six months ago we said we were uncertain about whether we would see higher inflation going forward but we thought the risks were to the upside. Since then oil prices have dropped from $75 per barrel to $45 per barrel with many other commodity prices dropping as well. Consequently we no longer think the risks are to the upside and don’t expect higher inflation in the near future.

We also see a couple of wild cards out there. The first is Brexit, which is scheduled to happen in late March. Currently there is no agreement between the United Kingdom and the European Union (EU) to govern relations between them post Brexit and the proposed agreement they’ve been negotiating for two years has yet to come up for a vote in the English Parliament. If Brexit occurs without an agreement (a “hard” Brexit) we expect some volatility, but don’t know how much. It is also possible that an agreement will be reached or that the negotiation process will be extended. The second wild card is the ongoing trade dispute between the U.S. and China. This has the potential to get better or worse and we have no insight into which way it will go. The range of possible outcomes is wide and could impact markets significantly either in a positive or negative fashion.

As the New Year begins we have plenty of cash available to invest but are in no hurry to put it to work. We will continue to methodically search for good investment opportunities and will be patient until 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.

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.

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.

S&P 500 is a widely recognized, unmanaged index of common stock prices. The S&P 500 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

At our November webcast, Ron and Jeff Muhlenkamp examined the ripple effect and the unintended consequences of changes to interest rates, regulations, tariffs, and the money supply. An example being: In an effort to unwind its Quantitative Easing measures, the Federal Reserve is continuing to raise short-term interest rates and reduce its balance sheet. These higher interest rates have contributed to a slowdown in the housing market which could lead to a decline in home prices.

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

By Ron Muhlenkamp and Jeff Muhlenkamp, Portfolio Managers

At the end of the third quarter the U.S. economy is by most indicators in good shape. Real (inflation adjusted) GDP growth the first two quarters averaged 3% and forecasts are for the full year to come in at about 3%. Small business and consumer sentiment indicators are at high levels. Unemployment is quite low and most credit metrics are looking fine. Companies are bringing overseas cash back home and are, in general, doing three things with it: investing in their business, sharing it with employees, and sharing it with owners (the mix varying a bit by company). If you are looking for reasons to be optimistic the domestic economy provides plenty of them.

There are also some reasons to worry (there always are). Domestically, the worries center on inflation (which is approaching 3%) and rising short-term interest rates. Long-term interest rates haven’t really done much all year, which is somewhat surprising given good economic growth and 3% inflation. Rising short-term interest rates are being driven by the Federal Reserve which kept the Federal Funds Rate near zero from 2009 until 2015 and is now steadily raising that rate to get back to what they consider “normal.” There are two problems with this: no one is quite sure what “normal” is anymore (more precisely, the interest rate that neither spurs nor retards economic growth—a neutral rate) and there is the distinct possibility that some businesses have become accustomed to very low interest rates and will not survive in a higher rate environment. So the Fed is feeling its way along, slowly raising the Federal Funds Rate and reducing the assets they hold, hoping they don’t disrupt economic growth. Higher inflation will put the Federal Reserve on the horns of a dilemma, which is why it is a worry. The Federal Reserve has a target of 2% inflation, which we are now above. At some inflation level the Fed will feel compelled to raise rates more rapidly to fight inflation which would increase the odds of slowing the economy and would be negative for asset markets. So it is entirely possible that, despite their best intentions, the Federal Reserve’s monetary policy either creates problems in an economy dependent on cheap credit, or spurs higher inflation first, then chokes the economy to curb the inflation they stoked. Currently we have 3% real economic growth and 3% inflation—so far so good.

Internationally, we find more reasons for worry than reasons for optimism. First, the strong dollar is creating problems for countries that borrowed a lot of dollars. This has exacerbated existing problems in a number of countries and we’ve seen their currencies plummet, most notably Argentina and Turkey. The potential exists for them to default on their dollar denominated loans which would impair the banks and others that lent them the money. At the extreme, those defaults could ripple through the international banking system and create a wider problem. That’s not what we expect to happen, but we are watching for the early warning signs that something like that is occurring.

Second, on a global basis, monetary policy continues to move back towards normal as central banks end their extraordinary policies. You may recall that the central banks of the U.S., Europe, and Japan all dropped interest rates to essentially zero and implemented asset buying programs in order to spur economic growth and generate inflation. The U.S. Federal Reserve was the first to start moving back towards normal by ending their asset purchase program in 2014, raising short-term rates beginning in 2015, and reducing their assets beginning in 2017. The European Central Bank (ECB) is the second major central bank to move back towards normal. The ECB has announced it will end its asset purchase program in December 2018 and will look to begin raising rates perhaps in mid to late 2019. We think this will allow interest rates in Europe to rise which will reduce upward pressure on the dollar and create downward pressure on U.S. long-term interest rates. This is a big step towards tighter money on a global basis.

We think the loose central bank policies inflated pretty much all asset prices around the world. Additionally, all kinds of borrowers have taken advantage of the abundance of cheap money—countries, companies, and individuals. We expect the withdrawal of that monetary support to exert downward pressure on asset prices and are concerned that some of those borrowers will not be able to support the debt they took on. It’s a big shift and it will take time to unfold and time for the problems to become manifest, but we are four years into it with another big move coming. We think the plunging currencies of Turkey and Argentina are first of the problems that will unfold in this tighter monetary environment.

The above is really a reiteration of what we’ve been saying all year. A strong U.S. economy boosted by changes in the tax code and reduced regulations is a positive force in the markets. The shift from a very loose monetary environment to something less loose is a negative. We said at the beginning of the year that these two drivers (strong U.S. economy & the tightening of the money supply) would shape the markets in a fashion we couldn’t predict.

In March, President Trump injected a wild card as he seeks to restructure the trading relationships between the U.S. and other countries. In general, the pattern seems to be for the U.S. to unilaterally levy tariffs on imports until we convince the other party to sit down and seriously bargain. Some countries came to the table after the first round of tariffs: Korea and Japan. Others came right back at us with their own tariff schemes for a round or two then sat down: Mexico, Canada, and the European Union. We have yet to get China to the bargaining table after what is, by my count, four rounds of tariffs and counter-tariffs. So far, the markets haven’t reacted much to this activity, but the potential remains for global trade (and by extension global growth) to be significantly affected. So we’ve added “Trade” to our worry list and we’re incorporating it in our thinking. We’ll keep you posted.

So far this year, we’ve done more selling than buying and are holding a bit more cash than we were at the start of the year. This activity has been bottom up driven: a number of our holdings met our sell criteria and so were reduced or sold and the number of buying opportunities has been low. We are comfortable holding a little more cash given the change in the monetary environment and will put that cash to work when we find a lucrative opportunity.

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.

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.

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).

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
At the end of the third quarter the U.S. economy is by most indicators in good shape. Real (inflation adjusted) GDP growth the first two quarters averaged 3% and forecasts are for the full year to come in at about 3%…

Don’t Let Financial Fraud Happen To You
In the good old days, scammers could only reach you face to face, by mail, or by phone. Now, they can also attempt to deceive you through email and on the Internet. Unfortunately, you always have to be on guard…

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 – August 30, 2018 Webcast
During our webcast, Ron and Jeff updated participants on the changes in the economic indicators that they monitor and the potential threats and improvements to the U.S. economy and asset markets. They believe the U.S. government has removed some impediments to business, but are wary of cross-currents that might create problems. They also talked about what they are seeing in foreign economies, especially changes to the currency rates compared to the U.S. dollar and the ongoing changes to trade and tariffs.

No File Found

During our webcast, Ron and Jeff updated participants on the changes in the economic indicators that they monitor and the potential threats and improvements to the U.S. economy and asset markets. They believe the U.S. government has removed some impediments to business, but are wary of cross-currents that might create problems. They also talked about what they are seeing in foreign economies, especially changes to the currency rates compared to the U.S. dollar and the ongoing changes to trade and tariffs.

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
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.

No File Found

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

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Ronald H. Muhlenkamp Retires from Muhlenkamp & Company

At the age of 75, Ronald H. Muhlenkamp retired from the investment management firm Muhlenkamp & Company, Inc. on February...
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Muhlenkamp & Company’s 40th Anniversary

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