Jeff and Tony Muhlenkamp discuss the economic disruptions caused by the COVID-19 pandemic.
Click below for the recording of our webcast.

Click here for the amended transcription (including slides).

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.

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Our webcast, led by Tony Muhlenkamp, takes a fresh look at an old topic: how do we save for college? Given the past few months, should we change the way we plan and save for our children’s education? Watch the webcast to hear our ideas on planning for your financial future.

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

Click here for the amended transcription (including slides).

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.

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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
Before Ron and I start with our normal topics, please allow us to extend our heartfelt wishes for good health and good luck during this exceptional period. Also, our deepest thanks to all of you that are reaching out to help others. We are continually amazed at the many, many ways we see people helping each other and are inspired and heartened by such actions…

Letter to My Daughters: On Crises and Disasters
Right now, we are in the middle of a crisis. Schools and colleges and churches and businesses are closed. Restaurants are takeout and delivery only. Paper towels and toilet paper and bleach wipes are all sold out…

Register for our Upcoming Webcast
Our webcast, led by Tony Muhlenkamp, is not only timely to the COVID-19 but, the time is now to host this webcast simply because financial planning for college, trade school, your “teen’s” future…should never be a second thought. Don’t panic…we will cover topics that will not resemble the past but the future. Please join this conversation as we think about planning for our financial future,…a bit differently.

Archive Available – February 27, 2020 Webcast
During our webcast, Jeff Muhlenkamp discussed the state of the economy and the threats he perceived to it and the markets.

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By Ron Muhlenkamp, Founder and Jeff Muhlenkamp, Portfolio Manager

Before Ron and I start with our normal topics, please allow us to extend our heartfelt wishes for good health and good luck during this exceptional period. Also, our deepest thanks to all of you that are reaching out to help others. We are continually amazed at the many, many ways we see people helping each other and are inspired and heartened by such actions. Thank you.

Additionally, we’d like to reassure you that Muhlenkamp and Company is fully operational and open for business. Our employees are doing a fantastic job working from home continuing to provide the service you’ve come to expect. I’d like to publicly thank Rich Dean, our Operations and IT Manager, for his hard work putting in the systems that allow us to do that. Thanks Rich.

Now, here’s what we’re seeing:

The week of March 9th is when America changed its mind about the novel Coronavirus now called COVID-19. To be sure, the subject had been in the news prior to that, but received little notice. That week, however, the seriousness of the illness caught America’s attention and decision makers at all levels reacted. Like a school of fish that suddenly changes direction with no obvious leader or signal, America shut down its colleges, athletic events, concerts and gatherings, local schools, bars and restaurants, then finally, in many places, anything deemed “non-essential”. I find it really interesting that this change in direction was much more “bottom up” than “top down”.

The stock market reaction was similarly rapid with the S&P 500 Index falling approximately 34% from the peak on February 19th to the trough (to date) on March 23rd. Bond markets tanked as well. Investment-grade bonds as represented by the Markit iBoxx USD liquid investment-grade index fell 18.9% from March 6th to March 20th. High-yield bonds, as represented by the Markit iBoxx USD liquid high-yield index fell 21.8% from February 20th to March 23rd.

Unlike most recessions where the change in economic activity is relatively slow, and even at the trough most businesses have some revenue, this time we shut down many businesses (airlines, cruise ships, theme parks, restaurants, many retail stores, etc.) very suddenly and many of them will have zero revenue for an indeterminate period of time. Businesses and investors suddenly started thinking about cash the way consumers suddenly started thinking about toilet paper: they couldn’t get enough of it fast enough. Companies drew down lines of credit, businesses and investors sold assets to include stocks, bonds, and shares in money market funds. This was not just a U.S. phenomenon. Overseas companies have borrowed heavily in dollars and they too ran for cash denominated in dollars. This sudden dash for cash created enormous stress in the banks and asset markets.

In order to support the continued functioning of credit markets, the Federal Reserve has embarked on a massive buying program of pretty much everything but junk bonds and equities. They’ve also created swap lines with other central banks to get dollars overseas. Their intervention has been huge, fast, and necessary. In order to help small businesses, households, and specific industries remain solvent during this shutdown, Congress passed a $2 trillion support package. It is not yet clear if the Federal Reserve interventions or the Federal Government support will be enough, it’s too early to tell. The speed with which the government acted is noteworthy.

America is intentionally holding the economy down to slow the spread of the virus. The key to letting the economy back up off the mat is: reduce the risk of rapid contagion to a level we can live with. I don’t think we’ll eradicate the virus any more than we’ve eradicated the flu or the common cold. In the long term this will be another chronic condition that we will collectively manage. We think the leading indicator now for economic activity is going to be the change in the acceleration of new corona virus cases. In other words, when will the spread of the virus slow? Our guess, based on the Chinese experience, is that the acceleration will begin to slow 2-4 weeks after social distancing measures really took effect. We are tracking publicly available information to see if our base case is working out, or not. That will give us some idea of the duration of the intervention. The other big unknown is how much damage was done to the economy. We probably won’t really start to understand that until April as companies start to report their quarterly earnings and government data starts to come in. There remain a lot of unknowns.

The United States is not, of course, the only country affected by the virus. China has already been through the worst of it and is recovering. Europe is maybe a week or two ahead of the U.S. in dealing with the virus. Even as China’s lock down affected our supply chains, China’s exports are going to be affected by the shutdowns in Europe and the U.S., two of their biggest customers. These linkages will slow everyone’s recovery somewhat.

It is also possible that the economic stress of dealing with the virus kicks off a self-reinforcing cycle of problems. Cascading defaults on loans are possible which is why governments are pumping money into households and businesses so quickly in an attempt to deal with the problem before it grows out of control. The increase in oil production by Russia and Saudi Arabia, which has collapsed the price of oil to $20 per barrel, is putting enormous stress on energy producers globally, increasing the likelihood of defaults there. Banks are always vulnerable in a recession: reduced credit availability or even bank failures are possible. (The Federal Reserve, in particular, is acting quickly to nip this potential problem in the bud). Finally, this is an election year in the U.S. and the agenda just changed. It’s too early to know what new policy proposals will be put on the table or to hypothesize what their impact will be economically, but a major shift in how the government interacts with all or some of the economy is possible. Europe is also vulnerable to upheaval, and we’ll be watching that.

The selloff in the markets is presenting us with better pricing on companies than we’ve seen in quite a while and we are working hard looking for the best opportunities. Jeff developed a rule of thumb in ’08-’09 that goes like this “When the market is down 30% and the headlines are all screaming ‘Recession!’ the next six months will be a pretty good time to put money to work.” Substitute “Virus” for “Recession” and that is exactly where we are today. We’re not calling a bottom, we really don’t know if we’ve hit the market bottom or not, but we are pretty sure the next six months will be a good time to go shopping, and that’s what we’re focusing on.

With our best wishes for your success and good health!

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.

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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.

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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.

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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.

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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.

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