During our webcast, Jeff Muhlenkamp discussed the state of the economy and the threats he perceived to it and the markets. Since then the rapid spread of the Coronavirus (COVID-19) and unprecedented measures by governments at all levels have rendered much of what he discussed irrelevant. We don’t know any more about the health risks posed by the COVID-19 than you do. Nor do we, or anyone else, know the secondary and tertiary political and economic consequences of the virus spreading.

We do know financial markets and we know our portfolio. We know the financial markets have been fully to overpriced and were past due for prices to drop. We know the companies we own have solid business and financial foundations and that while the stock prices of our companies are falling with the rest of the market the companies themselves are likely to survive and thrive. Nobody likes falling markets, including us. But low prices are the only way to get good companies cheap. We continue to implement our process of bottom-up, fundamental, value-seeking stock picking. In other words, we continue to try to buy low in expectation of being able to sell high. We are sitting tight through the current markets looking for that opportunity.

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.

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
In round numbers, the S&P 500 Index had a total return of 31% in 2019, the Russell 3000 rose 30%, the Dow Jones Industrial Average rose 25%, and our accounts increased by about 14%…

Prolific Natural Gas in the United States: Looking Back Over the Last Decade
A bit more than a decade ago the combination of horizontal drilling and hydraulic fracturing began to transform the energy industry in the United States. These techniques unlocked oil and natural gas trapped in shale rock formations: energy resources our geologists were well aware of but which could not be recovered economically before then…

Register for our Upcoming Webcast
Join Tony Muhlenkamp as he hosts a chat with Ron and Jeff Muhlenkamp. They will discuss what they are seeing in the economy and the markets. In addition to listening to the conversation, you will have the opportunity to ask questions.

Archive Available – December 11, 2019 Webcast
A record-long economic expansion and bull market in the U.S. are continuing. Are problems developing that could end them? During our webcast, Ron and Jeff Muhlenkamp reviewed the indicators they regularly look at to help them answer that question. They also briefly discussed areas where they are finding attractive investments and where they are not.

No File Found

By Ron Muhlenkamp, Founder and Jeff Muhlenkamp, Portfolio Manager

In round numbers, the S&P 500 Index had a total return of 31% in 2019, the Russell 3000 rose 30%, the Dow Jones Industrial Average rose 25%, and our accounts increased by about 14%. (Individual performance varies by account, see your annual statement.) Why the difference? While recognizing the limitations of all generalizations, we would argue that there are two categories of companies that the market continues to award a premium to: very safe, defensive companies (think utilities and Real Estate Investment Trusts) and disruptive or high-growth companies (examples include Amazon, Tesla, and Mastercard). We own little of either category, so the market is bidding up stocks we mostly don’t own. We remain interested primarily in profitability over the longer term and the price at which we can buy it while the market appears to be less concerned than we are about profitability and pretty price insensitive for popular companies. We expect eventually the market will come back to our way of thinking, but it sure didn’t in 2019. On an absolute basis we had a good year, on a relative basis we did not.

Looking back over 2019 only two things really mattered much to the economy of all the things that hit the headlines: tariffs and the Federal Reserve. The imposition of tariffs on imported goods forced a re-evaluation of a lot of supply chains and was a headwind for businesses. The Fed reversed the direction of policy in January: shifting from raising rates and reducing their balance sheet to lowering rates and expanding their balance sheet. This avoided a problem: when the Fed is raising rates and pulling money out of the economy by shrinking the balance sheet, sooner or later highly indebted companies have a problem rolling over their debt. This is the concern we voiced over two years ago when they began this “tightening.” Now that they’ve reversed themselves our longstanding concern is deferred to a later date to be replaced by worries that higher inflation is now more likely. There is no free lunch. On average, the economy continued to grow at a modest pace, but if you look at it by sector the results were mixed. Housing improved, but industrial production declined. Energy was weak due to low oil prices, retail was a mixed bag, etc. Inflation remained low. Unemployment continued its downtrend and median wages picked up. We spoke on a number of occasions during the year about the areas where we see warning signs and areas that look pretty good. It’s been a mixed bag all year and remains so at year end.

Looking forward, what do we expect? We think the point of maximum uncertainty in trade rules is behind us and businesses will stop postponing strategic decisions. If inflation remains low, the Fed will keep short-term interest rates low and market-based long-term interest would also stay low. Rising inflation would be a problem for stock and bond markets and force some hard decisions on the Fed—we have no strong opinion on the direction of inflation in 2020. We’ll be watching measures of industrial activity closely, a further or extended decline would be worrisome. We will also watch credit metrics closely—they look pretty good right now. Our baseline is for continued moderate economic growth in the U.S. and we’ll let you know if we are seeing signs of a further slowdown or acceleration.

The bull market in stocks has run for a decade now and there are portions of the market that look expensive to us. Safety, disruption, and high growth are all attributes of companies that have been bid up. Momentum seems to have legs in this market as well, perhaps because of the increased use of market-cap-weighted Exchange Traded Funds. As our holdings become fairly valued, we’ll pay more attention to the price trend, selling when it appears to be rolling over. We continue to hunt for the underappreciated and thus cheap stocks and will buy them 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

A record-long economic expansion and bull market in the U.S. are continuing. Are problems developing that could end them? During our webcast, Ron and Jeff Muhlenkamp reviewed the indicators they regularly look at to help them answer that question. They also briefly discussed areas where they are finding attractive investments and where they are not. Click below to view our archive.

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.

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
It’s been a noisy summer. Lots of political news, lots of tariff and trade war news, lots of international headlines of various sorts. Funny thing though, as we write this note during the last week of September the S&P 500 Index is within three percent of the all-time high it set in July. By that measure, it’s been a quiet summer…

Letter to My Daughters: On Money
We talk about money a lot in our family, which is no surprise since the family business is helping people with their money so that they can enjoy financial independence and some freedom in how they live. And most of our conversations are practical and pragmatic in terms of how to earn money, how to invest it, how to support a philanthropy, how to fund an education, how to manage taxes, etc. When we talk about money, we rarely make any value judgements about it…

Register for our Upcoming Webcast
Join Tony Muhlenkamp as he hosts a chat with Ron and Jeff Muhlenkamp. They will discuss what they are seeing in the economy and the markets. In addition to listening to the conversation, you will have the opportunity to ask questions.

Archive Available – August 29, 2019 Webcast
During our webcast Ron and Jeff Muhlenkamp examined some financial indicators to determine the overall health of the economy. In summary, they share that economic indicators remain mixed, though a little worse off than last quarter. In some aspects of the economy, there has yet to be a full recovery from the previous recession. Are we headed for another downturn in the near future? See what your conclusion is after hearing their economic report.

No File Found

By Ron Muhlenkamp, Founder and Jeff Muhlenkamp, Portfolio Manager

It’s been a noisy summer. Lots of political news, lots of tariff and trade war news, lots of international headlines of various sorts. Funny thing though, as we write this note during the last week of September the S&P 500 Index is within three percent of the all-time high it set in July. By that measure, it’s been a quiet summer.

If we filter out the noise, what are the important things going on today, economically, financially, and politically? Here’s what we observe:

1. The reset in trade relations between the U.S. and China is still being negotiated. Some of the tariffs announced over the last year have actually taken effect, others have been delayed. At this time, we hesitate to predict when a comprehensive agreement might be reached and are assuming the negotiations continue for the foreseeable future with the accompanying noise.

2. The renegotiation of the relationship between the United Kingdom and the European Union (EU) is ongoing. Despite a new Prime Minister (Boris Johnson) in the United Kingdom and an October 31st deadline, this doesn’t look like it will be resolved any time soon either. We are likewise loathe to predict the eventual outcome of this debate or to estimate the timeline. It seems that investors have reached a similar conclusion as news on this topic hasn’t impacted markets lately.

3. Germany is very near, or already in, a recession. Slowing growth in China is having a magnified effect on Germany—which supplies China with capital and luxury goods. As the biggest economy in the EU, a German recession could hurt a lot and increase the risks to financial markets presented by weak European banks. We don’t think we’ve seen the full impact of this yet.

4. U.S. treasury yields plunged in August, setting new lows for the 10-year and 30-year, inverting the yield curve (when short-term rates are higher than long-term rates), prompting the Federal Reserve to end their balance sheet reduction program ahead of schedule and to cut the Federal Funds Rate (short- term interest rates that they control) twice: by .25% in August and by .25% again in September. Recall that the Federal Reserve raised the Federal Funds Rate by .25% in December 2018—they have very quickly reversed themselves. An inverted yield curve has historically been the harbinger of recessions in the United States, with a lag of between 6 and 18 months. Historically, the yield curve typically inverts when the Federal Reserve raises short-term rates above long-term rates in a deliberate effort to slow the economy and contain inflation—that’s not the case this time. The Federal Reserve is not trying to fight inflation and was trying to restore short-term rates to something they consider “normal”. Long-term rates dropped below short-term rates, surprising the Fed (in our opinion). We hesitate to say “this time is different” with regard to a yield curve inversion as that is usually a dangerous statement to make, but things are a little different this time and it is at least possible that the outcome will be different as well.

5. Inflation remains low. The U.S. Consumer Price Index (CPI) shows 1.7% year-over-year inflation at its latest reading. Recall that the Federal Reserve’s goal is inflation of 2%—thus the above statement that they are not raising rates to contain inflationinflation is actually lower than their target.

6. The industrial growth is slowing in the U.S. and globally (see German recession above). In the U.S. this looks a lot like the slowdown we saw in late 2015 – early 2016. In fact, this is the third such slowdown since the last recession—the first was in late 2011. Neither of the first two resulted in a recession. If the availability of credit drops (we’re not seeing this now) or the service side of the economy slows down as well (the signals here are mixed), we could be looking at a recession in the near future.

Looking forward, it’s not a stretch to suggest that political actors will increasingly attempt to sway voters with their actions, and market participants will factor into their forecasts the likelihood of policy change. Does that mean President Trump will look for a “win” with China timed to help him in the ’20 election? Very possibly. Has the recent weakness in Healthcare and Energy been due to the emergence of Senator Warren as the Democratic frontrunner? Also possible. What we believe is certain is that investors like us will do their best to anticipate the outcome of the election and position their portfolios accordingly.

We remain reasonably defensive in our holdings and continue to evaluate them on an individual basis—selling when full value is reached, buying what we view as undervalued. In general, we are not adding companies that we consider particularly sensitive to the economic cycle because we haven’t seen indicators of the slowdown begin to improve and frankly most “cyclical” companies aren’t priced for a recession. We’ll be patient.

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

During our webcast Ron and Jeff Muhlenkamp examine some financial indicators to determine the overall health of the economy. In terms that we can all understand, they explain each chart, slide by slide, looking at both causes and symptoms of conditions that can lead to growth or decline. In summary, they share that economic indicators remain mixed, though a little worse off than last quarter. In some aspects of the economy, there has yet to be a full recovery from the previous recession. Are we headed for another downturn in the near future? See what your conclusion is after hearing their economic report.


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.

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 Federal Reserve last raised short-term interest rates in December 2018 and is now actively talking about cutting them. The futures market, in fact, is pricing in two to three cuts this year. The Fed has also stated they will end the shrinking of their balance sheet in October. They’ve undergone quite a shift in thinking over the last six months…

Lions and Tigers and Bears, Oh My!
Lately I am reminded of the scene from the Wizard of Oz which introduces the Cowardly Lion. Just before he leaps out at them, Dorothy and friends are worried about “Lions and Tigers. And Bears. Oh My!” Today we are hearing “Inflation and Deficits and Trade Wars, Oh My! Recessions and Debt and Negative Rates, Oh My!

Register for our Upcoming Webcast
Join Tony Muhlenkamp as he hosts a chat with Ron and Jeff Muhlenkamp. They will share their observations on the markets and the economy and what they feel is important to monitor. In addition to listening to the discussion, you will have the opportunity to ask questions.

Archive Available – May 30, 2019 Webcast
Ron and Jeff Muhlenkamp used several economic charts to discuss the trends they see, data that concerns them, and indicators that keep them optimistic. Listen to the archive to hear the discussion.

No File Found

By Ron Muhlenkamp, Founder and Jeff Muhlenkamp, Portfolio Manager

Here are the highlights of what we’re seeing so far this year:

The Federal Reserve last raised short-term interest rates in December 2018 and is now actively talking about cutting them. The futures market, in fact, is pricing in two to three cuts this year. The Fed has also stated they will end the shrinking of their balance sheet in October. They’ve undergone quite a shift in thinking over the last six months! Our concern last year was that the Fed, through the reduction of the balance sheet, would reduce dollar availability and cause asset markets to fall. The Fed’s actions this year have alleviated that concern.

Another dramatic reversal occurred in early May when the trade negotiations with China, which had appeared to be moving towards an agreement, came to a screeching halt as China had second thoughts about some of the terms of the agreement and the U.S. imposed another round of tariffs. The relationship with China was further strained a week later when the United States restricted sales of semiconductors and software to Huawei (a large Chinese tech firm that makes networking gear and low-cost cell phones). Huawei is somewhat of a national champion company in China, and cutting them off from U.S. suppliers is a mortal threat to the company. President Trump and President Xi met at the G-20 meeting in Osaka at the end of June and agreed not to take additional measures in the near term and to resume formal talks. The path forward is murkier than ever and we have no idea how or when a resolution will be achieved.

The same can also be said of Brexit (the withdrawal of the United Kingdom from the European Union). Prime Minister Theresa May has stepped down in the United Kingdom after having failed to find a way to exit the European Union that Parliament could accept. The UK is now going through the process of selecting a new Prime Minister. What that will mean for the Brexit process is unclear. Brexit concerns have not influenced the markets in a while, but the potential exists for the matter to become important again depending on the course of action the United Kingdom chooses, if they ever choose one.

On the home front, a number of U.S. economic indicators that we keep an eye on have begun to weaken, particularly in the industrial portion of the economy. The odds that we will see a slowdown similar to the one we saw in the winter of 2015 – 2016 are increasing. The stock market has not priced that in yet, but arguably the bond market has, as interest rates have fallen pretty dramatically this year with the 10-year U.S. Treasury yield falling from a high of 3.2% in October of 2018 to just over 2% today (that’s a pretty dramatic move in the bond market). It is possible, but by no means certain, that the slowdown will become a recession. Developments in this area certainly have our attention.

In summary, the Fed is no longer squeezing, there is increased uncertainty around trade and Brexit, and we see indications that the economy is slowing down. That’s what has been happening.

As we look forward, we expect uncertainty over trade and Brexit will continue. Until market participants think they can handicap the potential outcomes with some confidence, the news flow will probably affect market prices on a daily basis, so we expect some volatility. Currently market participants view the bad economic news as good for the market because they anticipate weak economic metrics will prompt the Fed to cut interest rates. If economic fundamentals continue to weaken those same participants will come to view bad economic news as bad for the markets. We already consider bad economic news as bad for the markets, which is partly the reason we have a higher-than-normal cash position. The other reason we are holding cash is we are simply not finding many investment opportunities that look interesting. As we find interesting opportunities, we will put the cash to work.

You may know that we’ve owned a gold ETF for several years now. We bought it as a hedge against central banks doing stupid things but for most of our holding period it has done very little – until recently. Gold is up about 10% in the last month.

So that’s what we’re seeing, and thinking, and doing. As always, if you’ve got questions give us a call, we’d love to talk with you.

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

During our webcast, Ron and Jeff Muhlenkamp use several economic charts to discuss the trends they see, data that concerns them, and indicators that keep them optimistic. For example: Delinquencies in auto loans continue to tick up. Credit card debt is now a concern and negative nominal yields on bonds continue in some countries (a historical aberration). Small business optimism and consumer confidence remain high. Watch our webcast to see what else they have to say.


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.

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

Library Navigation

Announcements

Business Continuity

Thanks to our rapid implementation of our Business Continuity Plan/Policies/Procedures; Muhlenkamp & Company remains open for business. If the markets...
More ›

COVID-19 Update

We don’t know any more about the health risks posed by the Coronavirus (COVID-19) than you do. Nor do we,...
More ›

Connect with Muhlenkamp

CLICK HERE TO Sign-Up for Our Newsletter and E-news Updates