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
Since early March the economy has been driven by public reaction to the unfolding COVID-19 pandemic. It remains our observation that public perception and actions are in the lead, not government actions, though there is significant feedback between the two…

About Our Client Relationship Summary
The Securities and Exchange Commission (SEC) recently required registered investment advisers and registered broker-dealers to provide a brief relationship summary to investors. The Client Relationship Summary is referred to as “Form CRS” and can be found on our website; I encourage you to take a look at it…

Webcast Archive Available – WORKING THE PROBLEM: The Impact of COVID-19 & Some Advice to Answer Our Clients’ Top Concerns Jeff and Tony Muhlenkamp discuss the economic disruptions caused by the COVID-19 pandemic.

Webcast Archive Available – Mapping Your Financial Future: It’s Never Too Late to Save for College 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.

No File Found

By Ron Muhlenkamp, Founder and Jeff Muhlenkamp, Portfolio Manager

Since early March the economy has been driven by public reaction to the unfolding COVID-19 pandemic.  It remains our observation that public perception and actions are in the lead, not government actions, though there is significant feedback between the two.  In the United States, the virus hit the Northeast hardest in the early days and is now continuing to spread in the South and West. The restrictive measures most states put in place in mid-March began to be relaxed in early May. In late June we saw a reversal of that trend as rise in new case counts, particularly in Florida, Arizona, Texas, and California have prompted those and other states to re-impose restrictions.  It isn’t clear when the case count will peak in those areas and whether fatalities will follow the case count with a lag, or if fatalities will remain low as the infected population skews younger than we saw in the March through May period.  It will take some time for that to become clear.  What remains clear is that the virus is deadliest for the elderly and those with pre-existing conditions.  It has also become quite clear that the behavior of the virus defies one-factor models and simple explanations.  There are still very limited treatment options and while many companies are working on a vaccine, they are all still in the testing phase and success remains merely a possibility, not a certainty.

Even as the response to the virus by the individual states continues to shift the response by the Federal Government is now largely in place.  The Treasury has sent money directly to many households, unemployment benefits have been increased, and a loan/grant program was created to help businesses remain viable even as their doors remain closed.  The Federal Reserve did its part by buying government bonds, municipal bonds, mortgage backed securities, corporate bond ETFs, and even individual corporate bonds: ensuring that most businesses could borrow in the markets if they needed to.  The government reaction from a monetary and fiscal perspective was huge, fast, and effective, at least so far.  Proposals to extend the fiscal support have been floated but not approved as our legislators take a “wait and see” approach for the time being.  Unsurprisingly some of the proposals have little to do with the impact of the virus and are thinly disguised attempts to throw money at politically favored groups.  Some things don’t appear to have changed at all.  One risk is that the need for supportive measures from the government outlasts the supply of money and we begin to see problems manifest themselves as the support runs out in late July.  Our base case is that additional support would be made available if needed.  We see no indication from any element of government that they are concerned in the least about how much debt we are racking up or other long-term consequences.  We don’t expect that to change in the near term.

Businesses of all sizes and in all industries are trying to figure out how to best operate under the new circumstances.  For online retailers and providers of streaming services the new conditions are nearly perfect, and they are growing rapidly.  On the other hand, the inability to gather in groups is a disaster for professional sports, movie theaters, musicians, schools, and restaurants.  We expect there will be a very difficult period of experimentation and adjustment as institutions try to adapt to the continually changing level of concern by their workers and customers and frequently changing government requirements.  It is too early to say which changes will be temporary and which will turn out to be permanent.  In the industries hit hardest by the pandemic it is also too early to say which companies will survive and which ones won’t.  Government aid programs and lender forbearance have given at risk companies much more time than is usually the case to try to make things work.  We won’t really start finding out who won’t make it until they run out of resources and support in the next few months.

We expect the uncertainty about the behavior of the virus and uncertainty about how to deal with the virus to continue.  We expect that uncertainty to be amplified by the media and others as political players seek to gain advantage in the upcoming election.  Those uncertainties have been reflected in the market over the past several months and will likely continue to be.  The unrest triggered by the death of George Floyd appears to have had little impact on the markets to date, but that could change.  There is also the potential for “something else” to hit the fan between now and the election.  The markets will also start to anticipate the outcome of the election at some point in the fall and because the stated economic policies of Biden are so different from Trump’s the market may swing significantly if the odds of victory shift between them.  In short, we expect significant market volatility at least through the election.

Over the last several months we have sold those of our holdings whose prospects we believe to be impaired by the virus: we sold our airline holdings, for example, as it looks like airline traffic will be impaired for years, not months.  We held on to other economically sensitive companies if we believed they were likely to do as well going forward as they have in the past: a good example is our holdings in homebuilders, whose business appears to be rebounding quite nicely after tanking in March through May.  We continue to hold gold as a hedge against errors by central banks and several of our technology companies are setting new highs as they benefit from current circumstances.  We continue to look for good investments without being in a hurry to invest our cash.  We think patience is appropriate right now.

With our best wishes for your continued 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.

No File Found

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.

No File Found

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.

No File Found

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.

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
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.

No File Found

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